Comparing Fair Value and Equity Methods Company A purchased a certain number of Company B’s outstanding voting shares at $20 per share as a long term investment. Company B had outstanding 20,000 shares of $10 par value stock. Complete the following table relating to the measurement and reporting by Company A after acquisition of the shares of Company B stock.
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Questions |
Fair Value Method |
Equity |
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a. What level of ownership by Company A of Company B is required to apply the method? |
% |
% |
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For b, e, f, and g, assume the following: |
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Number of shares acquired of Company B stock |
2,500 |
7,000 |
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Net income reported by Company B in first year |
$59,000 |
$59,000 |
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Dividends declared by Company B in first year |
$12,000 |
$12,000 |
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Market price at end of first year, Company B stock |
$17 |
$17 |
b. At acquisition, the investment account on the books of Company A should be debited at what amount? $_____ $_____
c. When should Company A recognize revenue earned on the stock of Company B? Explanation required. _____ _____
d. After the acquisition date, how should Company A change the balance of the investment account with respect to the stock owned in Company B (other than for disposal of the investment)? Explanation required. _____ _____
e. What is the balance in the investment account on the balance sheet of Company A at the end of the first year? $_____ $_____
f. What amount of revenue from the investment in Company B should Company A report at the end of the first year? $_____ $_____
g. What amount of unrealized loss should Company A report at the end of the first year? $_____ $_____