ACCT4104 / BUSI0003 (subclass C E) Advanced Financial Accounting

Chapter 1 Concept Quiz #1

Assume that Big Company owns a 20% interest in Little Company purchased on
January 1, 2014 for $200,000. Little then reports net income of $200,000, $300,000,
and $400,000, respectively, in the next three years while declaring dividends of
$50,000, $100,000, and $200,000. The fair values of Bigs investment in Little, as
determined by market prices, were $235,000, $255,000, and $320,000 at the end of
2014, 2015 and 2016, respectively.

With regards to Bigs investment in Little, calculate the change in Bigs total equity
from 2014 to 2016 and the carrying amount of the investment at the end of 2016
1. when fair value method is used.
2. when equity method is used.

Answer:
1. Change in Bigs total equity
= Dividend Income + Fair Value Adjustment
= $70,000 + 120,000
= $190,000

Carrying amount of investment

= $320,000

2. Change in Bigs total equity

= Equity in Investee Income
= $180,000

Carrying amount of investment

= Cost + Equity in Investee Income Dividends received
= $200,000 + 180,000 - $70,000
= $310,000