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    Equity Method and the Fair Value Method

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    (Equity Method)
    Parent Co. invested $1,000,000 in Sub Co. for 25% of its outstanding stock. Sub Co. pays out 40% of net income in dividends each year.
    Instructions
    Use the information in the following T-account for the investment in Sub to answer the following questions.
    Investment in Sub Co.
    1,000,000
    110,000
    44,000
    (a) How much was Parent Co.'s share of Sub Co.'s net income for the year? $
    (b) How much was Parent Co.'s share of Sub Co.'s dividends for the year? $ 44,000
    (c) What was Sub Co.'s total net income for the year? $
    (d) What was Sub Co.'s total dividends for the year? $

    Fair Value and Equity Method Compared)
    Jaycie Phelps Inc. acquired 20% of the outstanding common stock of Theresa Kulikowski Inc. on December 31, 2006. The purchase price was $1,200,000 for 50,000 shares. Kulikowski Inc. declared and paid an $0.85 per share cash dividend on June 30 and on December 31, 2007. Kulikowski reported net income of $730,000 for 2007. The fair value of Kulikowski's stock was $27 per share at December 31, 2007.
    Instructions
    (a) Prepare the journal entries for Jaycie Phelps Inc. for 2006 and 2007, assuming that Phelps cannot exercise significant influence over Kulikowski. The securities should be classified as available-for-sale.
    Date Description Debit Credit
    12/31/06

    06/30/07

    12/31/07

    (To record dividend)

    (b) Prepare the journal entries for Jaycie Phelps Inc. for 2006 and 2007, assuming that Phelps can exercise significant influence over Kulikowski.
    Date Description Debit Credit
    12/31/06

    06/30/07

    12/31/07

    (To record dividend)

    (c) At what amount is the investment in securities reported on the balance sheet under each of these methods at December 31, 2007? What is the total net income reported in 2007 under each of these methods? (If answer is zero, please enter a 0 do not leave any fields blank.)
    Fair Value Method Equity Method

    Investment amount (bal. sheet) $
    $

    Dividend rev. (inc. statement)

    Revenue from investment
    (inc. statement)

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    https://brainmass.com/business/accounting/equity-method-and-the-fair-value-method-206577

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    (Equity Method)
    Parent Co. invested $1,000,000 in Sub Co. for 25% of its outstanding stock. Sub Co. pays out 40% of net income in dividends each year.
    Instructions
    Use the information in the following T-account for the investment in Sub to answer the following questions.
    Investment in Sub Co.
    1,000,000
    110,000
    44,000
    (a) How much was Parent Co.'s share of Sub Co.'s net income for the year? $
    Under the equity method Parent Company would record the proportionate share of net income under the investment account. The T-account shows a debit of $110,000 which would be due to the income. The Parent's share of net income = $110,000
    (b) How much was Parent Co.'s share of Sub Co.'s dividends for the year? $ 44,000
    Dividends come as a credit in the investment account and that is $44,000
    (c) What was Sub Co.'s total net income for the year? $
    Parent has 25% of the stock and the proportionate net income is $110,000
    Total income would be 110,000/0.25 = $440,000
    (d) What was Sub Co.'s total dividends for the year? $
    In the same way the ...

    Solution Summary

    The solution explains how to calculate parent's share of income and dividends using the equity method and the fair value method

    $2.19

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