Answered Essay: Gant Company purchased 30 percent of the outstanding shares of Temp Company for $82,000

Gant Company purchased 30 percent of the outstanding shares of Temp Company for $82,000 on January 1, 20X6. The following results are reported for Temp Company:

 

20X6 20X7 20X8
  Net income $ 44,000 $ 39,000 $ 64,000
  Dividends paid 12,000 30,000 17,000
  Fair value of shares held by Gant:
     January 1 82,000 101,000 98,000
     December 31 101,000 98,000 109,000

 

Required:
Determine the amounts reported by Gant as income from its investment in Temp for each year and the balance in Gant’s investment in Temp at the end of each year assuming that Gant uses the following methods in accounting for its investment in Temp:

 

a. Cost method.

 

b. Equity method.

 

c. Fair value method.

 

Expert Answer

 

Amounts reported by Gant as income from its investment in Temp for each year and the balance in Gant’s investment in Temp at the end of each year assuming that Gant uses the following methods in accounting for its investment in Temp is as shown below:

Cost method
20X6 20X7 20X8
Dividend Income 3,600 9,000 5,100 30% of Dividend paid
Balance in Investment 82,000 82,000 82,000 No change in Investment carrying value
Equity Method
20X6 20X7 20X8
44,000*.3 39,000*.3 64,000*.3
Income from Investment 13200 11700 19200 30% of Net Inocme
Balance in Investment 91,600 94,300 108,400 Opening balance of investment plus Net income minus Dividend
Fair value Method
20X6 20X7 20X8
Income from Investment 22,600 9,000 16,100
Dividend Income 3,600 9,000 5,100 30% of Dividend paid
Gain (loss) on fair value 19000 -3000 11000
Balance in Investment 101,000 98,000 109,000
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