[Heisenburgh]

I was doing Becker’s multiple choice and I noticed an inconsistency

Question: Pare, Inc., purchased 10% of Tot Co.’s 100,000 outstanding shares of common stock on January 2, 20X1, for $50,000. On December 31, 20X1, 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 20X1. Tot reported earnings of $300,000 for 20X1. What amount should Pare report in its December 31, 20X1, balance sheet as investment in Tot?

Answers:

A. $230,000

B. $290,000

C. $170,000

D. $200,000

I originally picked A. $50,000 +$150,000 +(30%*$300,000) =$230,000
Beckers says the answer is “D”

Per Beckers – “Pare will use the equity method starting on December 31, Year 1, and will add its share of Tot’s earnings to the investment in subsidiary account in Year 2”.

I searched online , https://books.google.com/books?id=XzdLwM0hv0oC&pg=PA592&lpg=PA592&dq=pare+inc+purchased+10&source=bl&ots=MwYbV0F0og&sig=sLwnfMHtwqh58ICmieEHf8EyK8M&hl=en&sa=X&ved=0ahUKEwiOrIan3YXcAhUorlkKHfdLDNIQ6AEIaDAH#v=onepage&q=pare%20inc%20purchased%2010&f=false

Question#42 which seems to be identical but from 2009 also has $230,000. The only change I can see is that in 2009 you were suppose to retroactively adjust the Investment Account if you went from non-equity method to equity method.

I don’t see why Pare wouldn’t be entitled to the full $90,000 adjustment to its Investments account @ Dec 31 since it owns 30% at that time. Are you suppose to pro-rate the income and adjust the equity by (1/365)*(30%)*($300,000)?

[Anonymous]

With 10% ownership, you make the assumption that they don't assert significant influence (between 20-50%). Therefore the FV method is used until the ownership % is within the 20-50% threshold. Given the triggering of significant influence occurring at YE, the change occurs prospectively and the subsidiary's earnings, dividends, & amortization increases/decreases the investment each year after this triggering.

[Globetrotter]

$230,000 would have been correct in 2009.
But in 2016 a new “simplification” rule took place, where as Greg said, you only need to apply the rule prospectively.
Thus, $200,000 is the correct answer for the same problem if solved in 2018.

AUD - 94
BEC - 87
FAR - 87
REG - 87

BEC - 87 (03/2019)

AUD - 94 (11/2018)

REG - 87 (06/2019)

FAR - 87 (08/2018)

[Author]

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