Question

Dubois Corporation purchases an investment in Teton, Inc. at a purchase price of $9.0 million cash, representing 40% of the book value of Teton. During the year, Teton reports net income of $708,000 and pays $138,000 of cash dividends. At the end of the year, the market value of Dubois’ investment is $9.72 million.

a.	What is the year-end balance of the equity investment in Teton, Inc.?
b.	What amount of equity earnings would be reported by Dubois Corporation?
c.	What is the amount of the unrealized gain or loss at the end of the year? How does Dubois Corporation account for this unrealized gain or loss?

Answer 1

Answer a:

Year-end balance of the equity investment in Teton, Inc:

Purchase consideration = $9,000,000

Less, Dividends (40% * $138,000) = $55,200

Add, Share of net income (40% * $708,000) = $283,200

Year-end balance of the equity investment= $9,000,000 - $55,200 + $283,200 =$9,228,000

Answer b:

As calculated above:

Equity earnings would be reported by Dubois Corporation = $283,200

Answer 3:

Equity method is used in case for significant influence investments (generally considered to be at least a 20% interest).

Under Equity method of accounting, equity earnings (or loss) would be reported in Income Statement. As such an amount of $283,200 would be reported in Income Statement by Dubois Corporation.

Investors do not recognize unrealized gain or losses under the equity method. If the investment is permanently impaired, it may recognize loss to other comprehensive income.