Question

Santa Company purchased 2,000 of the 10,000 outstanding shares of Elves Company’s common stock for $60,000...

Santa Company purchased 2,000 of the 10,000 outstanding shares of Elves Company’s common stock for $60,000 on January 1, 2010. During 2010, Elves Company reported a dividend of $5 per share and net income of $75,000. At the end of 2010 the market value of a share of Elves Company’s stock has increased to $32 per share.

(a) If Santa Company accounts for the investment as a minority, passive and classifies the investment as an available-for-sale investment, then Santa Company will recognize what amount of 2010 income from the investment that contributes to net income?

(b) If Santa Company accounts for the investment as a minority, passive investment and classifies it as an available-for-sale security, then the investment will appear in the December 31, 2010 balance sheet at what amount?

(c) If Santa Company accounts for the investment as a minority, active investment and uses the equity method to account for the investment, then Santa Company will recognize what amount of 2010 income from the investment that contributes to net income?

(d) If Santa Company accounts for the investment as a minority, active investment and uses the equity method to account for the investment, then the investment will appear in the December 31, 2010 balance sheet at what amount?

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Answer #1
December 31, 2010 Reporting in Available for sale Investment Equity method used for Investment
Requirement a Income Statement
Dividend Income 10000
(=5*2000)
Requirement c Income in equity 15000
(=75000*2000/10000)
Requirement b Balance Sheet
Asset side
Investment in shares of Elvis Company 64000
(=2000*32)
Equity side
Fair value adjustment 4000
(=2000*2)
Requirement d Asset side
Investment in shares of Elvis Company 65000
(=2000*30+75000*2000/10000-2000*5)
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