Hi, Hope this is the right place to post this. I have two questions and I feel as if the concepts are contradicting each other if anybody can help I would appreciate it.
Pare, Inc. purchased 10% of Tot Co.'s 100,000 outstanding shares of common stock on January 2 of the current year for $50,000. On December 31, Pare purchased an additional 20,000 shares of Tot for $150,000. There was no goodwill as a result of either acquisition, and Tot had not issued any additional stock during the year. Tot reported earnings of $300,000 for the year. What amount should Pare report in its December 31 balance sheet as investment in Tot?
A. $170,000
B. $230,000
C. $200,000
D. $290,000
The correct answer is (C).
When Pare purchased an additional 20,000 shares of Tot at 12/31, it increased its investment in Tot's common stock from 10% to 30% [i.e., (10,000 shares + 20,000 shares) ÷ 100,000 shares = 30%].
On 12/31, Pare gained the ability to exercise significant influence over the financial and operating policies of Tot and accordingly should report its investment in Tot using the equity method in its 12/31 balance sheet.
The change from the cost method of reporting the investment in Tot to the equity method should be made by prospectively as of the date significant influence is acquired and going forward.
On the December 31 Balance Sheet would be the original investment of $50,000 plus the price paid for additional 20,000 shares – i.e. $150,000 – which will be equal to $200,000.
Pare will begin using equity method from January 1, Year 2 and proportionate earnings will be included from year 2 and not year 1.
so this question is telling me not to add the income that we had equity in at 10%, but rather add the carrying value of the investments. Going forward the income is attributed to the parent at 30%.
Question 2
On January 1 of the current year, Point, Inc. purchased 10% of Iona Co.'s common stock. Point purchased additional shares bringing its ownership up to 40%
of Iona's common stock outstanding on August 1. During October, Iona declared and paid a cash dividend on all of its outstanding common stock. How much
income from the Iona investment should Point's year-end income statement report?
A. 10% of Iona's income for January 1 to July 31, plus 40% of Iona's income for August 1 to December 31
B. 40% of Iona's income for August 1 to December 31 only
C. 40% of Iona's total year income
D. Amount equal to dividends received from Iona
On 1/1, Point purchased 10% of Iona's common stock. On 8/1, when Point increased its investment in Iona's common stock from 10 percent to 40 percent,
Point gained the ability to exercise significant influence over the financial and operating policies of Iona and accordingly should report its investment using
the equity method. The change from the cost method of reporting the investment to the equity method should be made by prospectively.
Here the correct answer is A. There must be something I am not understanding because this problem uses the equity method for the whole year based on the %'s. Why does this question use 10% of income (by way of equity method) and not the first one?
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