Purchase Solution

Equity method of accounting for Investments

Not what you're looking for?

Ask Custom Question

On January 1, 2009, Monroe, Inc., purchased 10000 shares of Brown Company for $250000, giving Monroe 10 percent ownership of Brown. On January 1, 2010, Monroe purchased an additional 20000 shares (20 percent) for $590000. This latest purchase gave Monroe the ability to apply significant influence over Brown. The original 10 percent investment was categorized as an available for sale security. Any excess of cost over book value acquired for either investment was attributed solely to goodwill.

Brown reports net income and dividends as follows. These amounts are assumed to have occurred evenly throughout these years.
Net Income Cash Dividends(paid quarterly)
2009 350000 100000
2010 480000 110000
2011 500000 120000

On July 1, 2011, Monroe sells 2000 shares of this investment for $46 per share, thus reducing its interest from 30 to 28 percent. However, the company retains the ability to significantly influence Brown. Using the equity method, what amounts appear in Monroe's 2011 income statement?

Purchase this Solution
Solution Summary

The solution shows in detail, the method of computing and accounting for investment in securities under the equity method of accounting. The gain on sale that would be shown in the income statement has been computed.

Solution Preview

Part I:
2009: Income statement (cost method - because no significant influence)
Dividend Income from investment = 100,000 x 10% = $10,000
2010: Income statement (equity method - because significant influence exists)
Share of net income = $480,000 x 30% = $144,000
2011: Income statement (equity method)
Net income of brown for the entire 2011: $500,000
Net income of brown for the period ...

Solution provided by:
Radhika Lakshmi, MPhil
Education
  • MPhil, Madurai Kamaraj University
  • MCom, Annamalai University
  • IATA, International Air Transport Association
Recent Feedback
  • "Great explanations on how the answers were obtained."
  • "Love the way she explains everything step by step."
  • "Solutions were thoroughly explained."
  • "Excellent explanations of how problems are solved"
  • "Thanks"
Purchase this Solution
Free BrainMass Quizzes
Business Ethics Awareness Strategy

This quiz is designed to assess your current ability for determining the characteristics of ethical behavior. It is essential that leaders, managers, and employees are able to distinguish between positive and negative ethical behavior. The quicker you assess a person's ethical tendency, the awareness empowers you to develop a strategy on how to interact with them.

Learning Lean

This quiz will help you understand the basic concepts of Lean.

Balance Sheet

The Fundamental Classified Balance Sheet. What to know to make it easy.

Employee Orientation

Test your knowledge of employee orientation with this fun and informative quiz. This quiz is meant for beginner and advanced students as well as professionals already working in the HR field.

Production and cost theory

Understanding production and cost phenomena will permit firms to make wise decisions concerning output volume.

View More Free Quizzes
Related BrainMass Solutions

  • Cost/equity/consolidated method

    13934 Cost/equity/consolidated method 3. What are the criteria for using the cost, equity, or consolidated method of accounting?

  • Prepare journal entries for investments

    494371 Preparing journal entries for investments Prepare journal entries for investments using the fair value and the equity method. How does it relate to the practice of accounting and its uses in business?

  • Explain how investors report investments in equity securitie

    The Fair Value Method (as per SFAS 115, Accounting for Certain Investments in Debt and Equity Securities, mandates that when the investor lacks the ability to significantly influence the financial and operating policies of the investee, (generally when

  • Multiple choice

    351099 Long-term investments/debt securities/equity securities/return on total assets/multiple choice 1. Accounting for long-term investments in equity securities with controlling influence uses the: controlling method.

  • equity method

    81062 Business Accounting: The Equity Method When an investor uses the equity method to account for investments in common stock, cash dividends received by the investor from the investee should be recorded as: a.

  • Classification of investmetns in financial statements

    What is the rationale behind the different accounting methods for the various investment classifications? Which is more important when determining the accounting method for securities, influence or ownership? Why? 2.

  • FASB statement No.115

    It requires companies to classify all securities investments that are not accounted for under the equity method into three categories: trading, available for sale or held to maturity.

  • Choice of Accounting Method - Slanted Building Supplies

    According to the FASB Interpretation No. 35 of Opinion No. 18, the Equity method of reporting should be applied for investments of 50 percent or less of voting stock of an investee enterprise, The Equity Method of Accounting for Investments in Common

  • Accounting for investment in equity shares of another firm

    Explain the rationale and reporting implications of the fair-value option for investments otherwise accounted for by the equity method. Describe the various methods of accounting for an investment in equity shares of another company.

  • C&G Corporation: Equity Method Accounting & Stock Options Expense

    Briefly describe two statement analysis issues with respect to equity method investments. d. Many equity method investments were caught up in the Fin 46R standard. i. Briefly describe the requirements of Fin 46R. ii.

View More Related Solutions