Question

Equity Investment

Brown Corporation earns $720,000 and pays cash dividends of $240,000 during 2018. Dexter Corporation owns 3,000 of the 10,000 outstanding shares of Brown.

Required:

a. What valuation method should be used to account for the above-referenced equity securities?

b. How much investment income should Dexter report in 2018?

c. What amount should Dexter show in the investment account at December 31, 2018 if the beginning of the year balance in the account was $960,000?

Answer 1

1) equity method- this method is used when an investor entity owns 20℅-50℅ of the voting stock of the associate company. Since in this case, the entity owns 30℅ (3000/10000) of the voting stock, equity method of valuation is to be used. Under this method only the own share of profit & losses of the investee is to be recorded by the investor company.

2) Earnings of brown corporation × share of Dexter co.

= 720000 × 3000÷10000  

= 720000 × 30℅

= 216000

3) Beginning balance of the account + (Earnings of brown corporation - cash dividend paid) ×share of Dexter corporation

= 960000 + (720000 - 240000) × 30℅

= 960000+ 144000

=1104000