Question

Pare, Inc. purchased 10% of Tot Co.'s 100,000 outstanding shares of common stock on January 2, 1992, for $50,000. On December 31, 1992, Pare purchased an additional 20,000 shares of Tot for $150,000. There was no goodwill as a result of either acquisition, and Tot had not issued any additional stock during 1992. Tot reported earnings of $300,000 for 1992. What amount should Pare report in its December 31, 1992, balance sheet as investment in Tot?

Answer 1

Answer:

Carrying value at end year = $50,000 + $150,000 + $30,000 = $230,000

Explanation:

Whenever there is an investment in a company, for more than 20 % shares then, equity method for investment is followed.

Under this method if any earnings from investment is made then such profit of subsidiary is added to cost of investment, for this the date of recording is considered, here the investment as on 31 December = 30,000 shares, therefore profits to be added will only be of 10% shares i.e. 10,000 shares acquired on 2 January and not on 31 December.

Investment made on 31 December will not be considered, for profits as was not acquired during the year.

Therefore profit on 10,000 shares = $300,000 $\times$ 10% = $30,000

Carrying value at end year = $50,000 + $150,000 + $30,000 = $230,000