Answer to Question #205973 in Accounting for Kkkk

Question

On January 4,2021, Tamara Bakery paid ₱30 million for 1 million shares of jade Company ordinary shares. The investment represents a 20% interest in the net assets of jade and gave Tamara the ability to exercise significant influence over Jade’s operations. Tamara received dividends of ₱1.00 per share on December 15,2021 and jade reported net income of ₱8 million for the year ended December 31,2021. The market value of Jade’s ordinary shares at December 31,2021 was ₱32 per share, on the purchase date, the book value of Jade’s net assets was ₱120 million and the fair market value of Jade’s depreciable assets with an average remaining useful life of six years exceeded their book value by ₱6 million. The remainder of the excess of the cost of the investment over the book value of net assets purchased was attributable to goodwill.

3. What amount of investment revenue should Tamara report on its income statement for the year ended December 31,2021, under the equity method?

Answer 1

Solution:

The investment revenue Tamara should report on its income statement for the year ended December 31, 2021, under the equity method is ₱1.4 million.

 

This is calculated as follows:

Jade reported net income of 8 million as at December 31,2021 = $20\%\times 8M = 1.6M$

Dr. Investment in Jade’s Co. shares                               1.6M

                   Cr. Investment revenue                                                      1.6M

(Being revenue made from investment in Jade’s shares)

 

Perform depreciation adjustment of the amount of fair market value of Jade’s depreciable assets exceeding Jade’s book value:

Depreciation adjustment = $(6M\times20\%)\div 6yrs = 0.2M$

Dr. Investment revenue                                                  0.2M

                   Cr. Investment in Jade’s Co. shares                                    0.2M

(Being depreciation amount adjusted)

 

Investment revenue to be reported on the income statement on December 31, 2021 = 1.6M – 0.2M = 1.4M

 

The investment revenue Tamara should report on its income statement for the year ended December 31, 2021, under the equity method is ₱1.4 million.