Question

On January 1, 2018, Company A paid $150,000 for 15,000 shares of Company B Company at...

On January 1, 2018, Company A paid $150,000 for 15,000 shares of Company B Company at $10 per share. This purchase gave Company A 15% ownership of Company B. In 2018, Company B reported net income of $180,000 and paid dividends to all shareholders of $50,000. The market value of Company B shares at December 31, 2018 was $12 per share.

On January 1, 2019 Company A purchased an additional 25,000 shares (25%) of Company B. This last purchase gave Company A the ability to apply significant influence over Company B.

What is the prior period adjustment to Retained Earnings that Company A will need to record on January 1, 2019?

Homework Answers

Answer #1

Equity methods to be recorded either as per

  • FVTNI - If % holding is less than 20%
  • Equity method - if % holding >= 20% upto 50% and significant influence exists

As per FASB's update, if % holding changes resulting in Significant influence(20% to 50% ownership) from no influence (less tha 20%) which results in change in method from FVTNI to Equity method, the new method should be followed prospectively from current year i.e. no effect on prior period.

In case of company A, In 2019 % ownership changed from 15% to 25% along with significant influence which needs to be given effect prospectively i.e. year 2019 and onwards. Hence, no prior period adjustment will be made to the opening retained earnings on year 2019.

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