(Equity Investment) On July 1, 2014, Selig Company purchased for cash 40% of the
ID: 2448456 • Letter: #
Question
(Equity Investment) On July 1, 2014, Selig Company purchased for cash 40% of the outstanding capital stock of Spoor Corporation. Both Selig and Spoor have a December 31 year-end. Spoor Corporation, whose common stock is actively traded on the American Stock Exchange, paid a cash dividend on November 15, 2014, to Selig Company and its other stockholders. It also reported its total net income for the year of $920,000 to Selig Company. Instructions Prepare a one-page memorandum of instructions on how Selig Company should report the above facts in its December 31, 2014, balance sheet and its 2014 income statement. In your memo, identify and describe the method of valuation you recommend. Provide rationale where you can. Address your memo to the chief accountant at Selig Company.Explanation / Answer
As Selig Company purchased 40% shares, Equity method of accounting may be adopted. Under this method, the investor company accrues its percentage of the earnings reported by the investee company each period. Dividend declarations reduce the investment balance to reflect the decrease in the investee’s book value. Accordingly the entries will be 01-Jul-14 Investment in Spoor Corporation Cash (To Record purchase of 40% of shares of Spoor Corporation) Investment in Spoor Corporation 368000 Equity in Spoor Corporation Income 368000 (To record accrued earnings of a 40 percent owned Spoor Co. Income) Nov.15,2014 Cash Investment in Spoor Corporation (To record receipt of cash dividend from Spoor Corporation Balance sheet as at 31/12/2014 will report investment at purchase value+ share of investee company's income - dividend paid by investee company. All entries are through this account only and the balance sheet reports the carrying value of the investment as calculated above.
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