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Watts Co. Adams Corp. Significant Influence -- Impact on inv

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On January 4, 2006, Watts Co. purchased 40,000 shares (40%) of the common stock of Adams Corp., paying $800,000. There was no goodwill or other cost allocation associated with the investment. Watts has significant influence over Adams. During 2006, Adams reported income of $200,000 and paid dividends of $80,000. On January 2, 2006, Watts sold 5,000 shares for $125,000. What was the balance in the investment account after the shares had been sold?

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Solution Summary

Your response gives you the rule for handling substantial influence investments and shows you the increases and decreases in the Investment in Subsidiary account so you can see how the earnings, dividend, and sold shares impact the balance and the ending amount needed.

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So, this problem requires that you understand the treatment of investments when there is significant influence. The investment goes up with your 40% share of earnings and down with the receipt of cash dividends. So, ...

Solution provided by:
Carol Sargent, PhD
Education
  • BSc, University of Virginia
  • MSc, University of Virginia
  • PhD, Georgia State University
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