[Anonymous]

Hi- I don’t agree with Wiley’s answer.

Pare purchased 10% of tot co’s 100k outstanding shares of common stock on Jan 2, 2010 for $50,000. On dec 31, 2010, Pare purchased an additional 20k shares of Tot for $150,000. There was no goodwill as a result of either acquisition, and Tot had not issued any additional stock during 2010. Tot reported earnings of $300k for 2010. Pare does not elect the fair value option to report its investment in Tot. What amount should Pare report in its Dec 31, 2010 balance sheet as investment in tot ?

A. 170k

B. 200k

C. 230K

D. 290K

Wiley lists C as the answer of 230k.

I don’t get how this is correct.

If they paid 50k and then 150k they owned 10% then 30% respectively.

I look at it this way.

The investment account in TOT should be 200k before any earnings by TOT.

If tot reports earnings of 300k, why wouldn’t Pare Inc. increase their investment in tot by 90k (300k X .30)?? Resulting in an ending balance of 290k Investment in TOT, NOT 230k. I thought this over and I just don’t get it.

Wiley’s answer explanation doesn’t cut it for me. They say an accounting change should be applied retroactively. So if that were the case, Pare should have owned 30% of TOT all year. But even so, at the end of the year they owned 30% and were entitled to 30% of the 300k. So I really think 290k should be correct. Ideas/comments/alternative explanations? Thanks

[mla1169]

They didn't buy the additional 20k shares until December 30, not sure that is considered an accounting change so that may be extraneous information?

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[Anonymous]

The purchase was at the end of the year, so it's only 10%..50+150+30..Bingo!

[jenuno01]

It's a cost vs equity method problem. These are very common, you need to review these rules… I would make sure you memorize the T-accounts that affect the investment account and the investment income accounts under both methods.

@CPATerminator is right. They bought the additional stock at year-end and the transaction qualified for equity method accounting, but only for the original ownership percentage which was 10%. So

50 (initial investment, still cost method)

+ 150 (additional investment)

= 200 –the Equity method has to be used

+ 10% of income = 30

200+30 =230

Class of 2012

[Anonymous]

Ok guys I get it now but still don't like it! I guess the theory is you owned 10% for the whole year and 30% for only a day. I saw a few dividend questions that were similar, so that helped if I see these on the test. Thanks

[Author]

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