ds to be u x D Quiz Questions 3-4 (of 6) The following information applies to th
ID: 2560840 • Letter: D
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ds to be u x D Quiz Questions 3-4 (of 6) The following information applies to the questions displayed below Bart Company had outstanding 30,000 shares of common stock, par value $10 per share. On January 1, 2015, Homer Company purchased some of these shares at $25 per share, with the intent of holding them for a long time. At the end of 2015, Bart Company reported the following: net income, $50,000, and cash dividends declared and paid during the year, $25,500. The fair value of Bart Company stock at the end of 2015 was $22 per share. Required: 1-a. Identify the method of accounting that Homer Company should use for purchasing 3,600 shares (Case A). TIP: Divide the number of shares purchased by the number outstanding to determine the percent of ownership O The Fair Value Method The Equity Method 1-b. Identify the method of accounting that Homer Company should use for purchasing 10,500 shares Case B. The Fair Value Method O The Equity Method 2. Prepare the journal entries for Homer Company at the dates indicated for each of the two independent cases. (if no entry is required for a transaction/event, select "No Journal Entry Required" in the first account field.) Case A. 3,600 Shares PurchasedExplanation / Answer
1-a) If an investor owns less than 20% of the investee's voting rights. then investor can not have significant influence over the investee. In that case the fair value accounting should be used but if the investor owns between 20% and 50% then the equity method of accounting should be used. In this case also firstly we need to calculate the share of ownership by Homer company.
Share of ownership = No. of shares purchased/Shares outstanding = 3,600/30,000 = 12%
Thus the fair value of method should be used as the share of ownership is less than 20%.
1-b)
Share of ownership = No. of shares purchased/Shares outstanding = 10,500/30,000 = 35%
Thus the equity method should be used as the share of ownership is more than 20%.
2) Case A Journal entries in the books of Homer company (Amount in $)
Date Particulars Debit Credit Jan 1, 2015 Investment in Bart Company 90,000 Cash 90,000 (To record the purchase of 3,600 shares at $25 per share ) ($25*3,600 = $90,000) Dec 31,2015 No entry is required in the books of Homer company for reporting of income of $50,000 by Bart company Dec 31,2015 Cash 3,060 Dividend Income 3,060 (To record the share of dividend received) (i.e. 25,500*12% = 3,060) Dec 31,2015 Investment Loss 10,800 Investment in Bart Company 10,800 (To record the decrease in the fair value from $25 to $22) [(25-22)*3,600 = $10,800]Related Questions
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