On January 1, 2016, Big Company spent $200,000 for a 20 percent interest in Litt
ID: 2423933 • Letter: O
Question
On January 1, 2016, Big Company spent $200,000 for a 20 percent interest in Little Company. There is no difference between the purchase price and the book value of the net assets acquired. Little reports net income of $200,000 and pays dividends $50,000. The fair value of Big’s investment in Little as determined by the market is $235,000.
REQUIRED:
In your opinion, how should Big account for the investment? Why? Are there any other alternative ways to account for the investment?
Based on your opinion, prepare the journal entries that Big would record for this investment.
Explanation / Answer
Big company should show the investment in little company at $200000 .i.e, at the cost of acquisition and alternatively it may value the investments at fair value i.e, 235000 if it tends to hold this as a short term investment.
Journal entry for investment is as follows
Account title and explanation Debit credit Investment in little company 200000 Cash 200000Related Questions
drjack9650@gmail.com
Navigate
Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.