3. Gant Company purchased 20 percent of the outstanding shares of Temp Company f

Question

3. Gant Company purchased 20 percent of the outstanding shares of Temp Company for $70,000 on January 1, 20X6. The following results are reported for Temp Company 20x6 20X7 20X8 Net income Dividends paid Fair value of shares held by Gant $40,000 15,000 35,000 30,000 $60,000 20,000 January 1 December 31 70,000 89,000 89,000 86,000 86,000 97,000 Required Determine the amounts reported by Gant as income from its investment in Temp for cach year and the balance in Gant's investment in Temp at the end of each year assuming Gant uses the following methods in accounting for its investment in Temp a. Cost method. b. Equity method c. Fair value method.

Explanation / Answer

Gant company will recognise income as follow

1. Cost Method

In cost method Gant will recognise investment on purchase price which is $70,000

when company received dividend on investment dividend amount is reconised as a investment income

Temp has any undistribbuted earning Gant will not recongnise as a income

Investment income and value are as follow

2.Equity Method

In Equity method initialy investment is recognised at purchase price and further value of investment is adjusted according to change in profit and loos of company

Income of investment is as follow

Investment value :-

3.Fair value method

In fair value Method Investment initially on purchase recognise at Purchase price , Further value of investment is recognised at Fair value on recognisation date . Difference is recognised as a investment income under comphrehensive income

Here Investment income will be as follow

2016 19000

2017 loss 3000

2018 11000

Investment is recognised at fair value as follow

in 2016 89000

2017 86000

2018 97000

Gant company will recognise income as follow

1. Cost Method

In cost method Gant will recognise investment on purchase price which is $70,000

when company received dividend on investment dividend amount is reconised as a investment income

Temp has any undistribbuted earning Gant will not recongnise as a income

Investment income and value are as follow

year investment income value of investment 20x6 15000 70000 20x7 30000 70000 20x8 20000 70000

2.Equity Method

In Equity method initialy investment is recognised at purchase price and further value of investment is adjusted according to change in profit and loos of company

Income of investment is as follow

Year Amount 20x6 $40000 20x7 $35000 20x8 $60000

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