Fill in the dollar changes caused in the Investment account and Dividend Revenue
ID: 2444784 • Letter: F
Question
Fill in the dollar changes caused in the Investment account and Dividend Revenue or Investment Revenue account by each of the following transactions, assuming Crane Company uses (a) the fair value method and (b) the equity method for accounting for its investments in Hudson Company. (Enter negative amounts using either a negative sign preceding the number e.g. -45 or parentheses e.g. (45). Do not leave any answer field blank. Enter 0 for amounts.)
(a) Fair Value Method (b) Equity Method Transaction Investment Account Dividend Revenue Investment Account Dividend Revenue 1. At the beginning of Year 1, Crane bought 25% of Hudson's common stock at its book value. Total book value of all Hudson's common stock was $750,000 on this date. 2. During Year 1, Hudson reported $69,000 of net income and paid $34,500 of dividends. 3. During Year 2, Hudson reported $29,000 of net income and paid $19,000 of dividends. 4. During Year 3, Hudson reported a net loss of $9,000 and paid $4,000 of dividends. 5. Indicate the Year 3 ending balance in the Investment account, and cumulative totals for Years 1, 2, and 3 for dividend revenue and investment revenue.
Explanation / Answer
A) Fair Value Method
If Crane Company uses Fair Value Method, Then the transaction should be recorded at Market Price
Under Investment Account, the transaction are recorded at Fair Price/Current Market Price, the profit or losses, if generated, should be realised in P&L A/c on yearly basis.
Dividend received should be treated as Income In Income Statement on yearly Basis.
B) Equity Method
In Equity Method, Transactions are recorded at Book Value. Dividend received are treated in Income in Income Statement.
Retained earnings by the Company is assumed to be invested for advancement of the Company, which in return appriciate the Stock Value each Year.
The presentation of Stock under this method in each year is as follows :-
Increment in Stock Value Realised as Income on yearly basis
In the books of Crane Co. Year Equity Method Investment Account Dividend Account 1 187500 0 2 8625 8625 3 2500 4750 4 -3250 1000 5 195375 14375Related Questions
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