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4.Dublin Company holds a 30% stake in Club Company which was purchased in 2018 at a...

4.Dublin Company holds a 30% stake in Club Company which was purchased in 2018 at a cost of $3,000,000. After applying the equity method, the Investment in Club Company account has a balance of $3,040,000. At December 31, 2018 the fair value of the investment is $3,120,000. Which of the following values is acceptable for Dublin to use in its balance sheet at December 31, 2018?

I. $3,000,000

II. $3,040,000

III. $3,120,000

a. I, II, or III.

b. I or II only.

c. II only.

d. II or III only.

Please show your work!!

Business   Accounting   
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Homework Answers

Answer #1

First of all Dublin co. will record the investment at cost. However the net income from the subsidiary will be recorded as an increase in investment. Hence, in this case the 40,000 increase in the investment depicts the 30% portion of income in the investment in club company.

The entries will be:-

At purchase of club company:-

Dr Investment in subsidiaries 3,000,000

Cr cash 3,000,000

Dr Investment in subsidiaries 40,000

Cr Investment Revenue 40,000

Hence net balance under equity method is $3,040,000.

However as per IAS 28, the parent can also show the Investment in subsidiaries at Fair value under equity method.

So the answer will be option (d).

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