Question

On January 1st, 2019, ABC Company bought 200,000 ordinary shares of NBK for $4,000,000. This investment...

On January 1st, 2019, ABC Company bought 200,000 ordinary shares of NBK for $4,000,000. This investment represents 30% of NBK ordinary shares. On December 31st, 2019, NBK announced a net income of $500,000 and paid dividends of $300,000.

At the end of 2019, ABC's equity investment in NBK will grow by

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Answer #1

ABC purchased 30% of shares in NBK. That means ABC has significant Influence over NBK & NBK can be treated as an associate of ABC.

NBK announced a net income of $ 500,000.ABC will debit 30% of $ 500,000 in its "investment in NBK" account while crediting the same amount as " Investment Revenue " in its income statement.

That means Investment Account Got Increased by 30% of $ 500,000 = $ 150,000

After 1 year NBK declared $300,000 as dividend to its shareholders.That means ABC will receive 30% of dividend.

So, ABC will credit "investment in NBK" and by debiting "cash" of an amount of $ 90,000 [$ 300,000*30%]

That means Investment Account Got Decrease by $ 90,000

In Overall, Investment Account balance will be 4,000,000+150,000-90,000 = 4,060,000

Therefore, Investment in NBK account grown by $ 60,000

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