Rich, Inc. acquired 30% of Doane Corporation's voting stock on January 1, 2018 for $1,000,000. During 2018, Doane earned $400,000 and paid dividends of $250,000. Rich's 30% interest in Doane gives Rich the ability to exercise significant influence over Doane's operating and financial policies. On January 1, 2019, Rich sold half of its stock in Doane for $660,000 cash.

a. What accounting should be made by Rich, Inc. for dividends received from Doane subsequent to the date of investment?

b. What amount should Rich include in its 2018 income statement as a result of the investment?

c. What should be the carrying amount of this investment reported on Rich's December 31, 2018 balance sheet?

d. What should be the gain on sale of this investment in Rich's 2019 income statement?

Question

Business

Cindy Glass

18 November, 16:08

Rich, Inc. acquired 30% of Doane Corporation's voting stock on January 1, 2018 for $1,000,000. During 2018, Doane earned $400,000 and paid dividends of $250,000. Rich's 30% interest in Doane gives Rich the ability to exercise significant influence over Doane's operating and financial policies. On January 1, 2019, Rich sold half of its stock in Doane for $660,000 cash.

a. What accounting should be made by Rich, Inc. for dividends received from Doane subsequent to the date of investment?

b. What amount should Rich include in its 2018 income statement as a result of the investment?

c. What should be the carrying amount of this investment reported on Rich's December 31, 2018 balance sheet?

d. What should be the gain on sale of this investment in Rich's 2019 income statement?

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Answers (1)

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Butterscotch · Answer 1

Answer: a) Reduce by $75,000

b) $120,000

c) $1,045,000

d) $137,500

Explanation:

a) Dividends reduce the investment amount by an investor in the business.

Rich owns 30% in stock so they are entitled to 30% in Dividends.

= 30% * 250,000

= $75,000

Rich's investment account should reduce by $75,000.

b) Doane Corporation earned $400,000 in earnings for the year 2018. Rich should include their share of this earnings in their income statement. Income also increases the investment account. As he owns 30%, they should include 30% of this in their statement.

= 30% * 400,000

= $120,000

c) The Carrying amount of an investment refers to what the investment is worth in the current period which is the end of 2018. Remember that dividends reduce the amount of the investment and income increases the amount.

The Carrying amount therefore is,

= Cost of Investment + Income attributed to Investment - Dividends

= 1,000,000 + 120,000 - 75,000

= $1,045,000

d) As the earnings and the cash dividends for the year 2019 re not available, assume that it is the same as 2018.

This will mean that the carrying value on July 1 will still be $1,045,000.

Rich sold half of their stake so half of the carrying value is

= 1,045,000/2

=$522,500

They sold it for $660,000 but it was worth $522,500. The Gain is therefore,

= 660,000 - 522,500

= $137,500