You are an intern in a CPA firm. Your manager walks into your cubicle and says, “One of our clients is thinking about investing in a company. He wants to know how he should account for this investment. Be prepared to discuss it with the client tomorrow.”
Write a memo to your manager giving your thoughts on how this should be handled by the client.
The situation is the following:
o Company F purchased 40% of the outstanding stock of company K on June 30, 20XX.
o Both of the companies have a December 31st, year end.
o Company K is a publicly traded company and reports its net income to company F.
o Company K also pays a hefty dividend to the shareholders of company F.
o How should company F report the above facts on its December 31, 20XX balance sheet and income statement?
o Support your answer. Advanced Accounting
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Accounting Procedure for Tidal Inc. Investment into Carson Co.
Just recently Tidal Inc. made a decision to purchase 40% of inventory in Carson Co. back in June, 2017. Since Carson Co. is a public company that has to report its total revenue to Tidal Co. as per the new deals involving the two companies, Carson Co. will have to pay the dividends to the shareholders of Tidal Co. Both of these two companies have their year-end date of 31st of December so it should be easier to align the calculations. For us to properly analyze and prepare professional statements related to revenue, there is a need to assess whether; Tidal Co. has huge effect over Carson Co. or whether it is only an overriding interest. The information provided by the two companies concerning their business dealings will help us a lot in determining which method we should undertake.
The Generally Accepted Accounting Principles recognizes three methods for accounting purposes. The three strategies include consolidation, fair-value and equity of all the financial statements relating to a particular period. Notably, equity as a method is used to report investments in commercial related securities. Fair-value method is used for companies that do not have a significant command or control in a company that is small and growing as compared to them. When an investor with influence over the company it has invested on but not full control, lest say an ownership of 20-50% voting stock, equity method is the most appropriate. Hen an investor has total control over the investee, the best accounting method to use is the consolidation of financial statements. Based on this information and the information provided by the client, I have decided to use the equity method for our case. (Hoyle, Schaefer, & Doupnik, 2013).
By applying the equity method, we have some information of Tidal Inc. has some significant influence over the financial transactions of Carson Co. Tidal has 40% ownership of the voting stock and that means they have say over the decisions of Carson Co. this method uses the accrual accounting method implying that whenever money is exchanged and revenues and expenses are recognized. The first investment is recorded and as the investment increases or decreases the transactions are recorded as profits or losses. Any dividend is channeled to the investment account.
Example of Journal Entries
Date Investment Record Debit Credit
30-Jun-2017 Investment in affiliate YY
Date Record Equity Income Debit Credit
xxxxxx investment in affiliate YY
Equity income in affiliate (40% x $2000) YY
Date Record Cash Dividend debit credit
xxxxxx Cash YY
investment in associate YY
The following example shows how the above transactions can be reported on the balance sheet and income statements at the end of year December 31.
(Equity method accounting, 2015)
Hoyle, J. B., Schaefer, T. F., & Doupnik, T. S. (2013). Fundamentals of advanced accounting. (5 Ed.). New York, NY: McGraw-Hill/Irwin. Retrieved from http://online.vitalsource.com/
Equity method accounting. (2015). Retrieved from https://www.macabacus.com/accounting/equity-method Advanced Accounting