[jinjuujii]

On January 1, Year 1, Peabody Co. purchased an investment for $400,000 that represented 30% of Newman Corp.’s outstanding voting stock. For Year 1, Newman reported net income of $60,000 and paid dividends of $20,000. At year-end, the fair value of Peabody’s investment in Newman was $410,000. Peabody elected the fair value option for this investment. What amount should Peabody recognize in net income for Year 1 attributable to the investment?

I don’t get the adjustment with the FV at year end. :/

FAR: 2-27-2015

[jas0n092]

I think it might be as simple as 60 * .30 . Is that the answer?

FAR - 85 8/12/14
AUD- 95 11/8/14
BEC- TBD 1/17/15
REG TBD May 2015

[jinjuujii]

Hi Jason:

You should also account for dividends too.

FAR: 2-27-2015

[confusedcandidate]

The fair value bit at the end means you have to adjust the difference in fair value and your book value from your income:

Beginning value: 400,000

+ your share of income: 18000

minus your dividends: 6000

End value per equity method: 412000

However the fair value per the question is only 410,000. Subtract 2,000 from your income of 18000 to find the correct answer: 16,000

Weekends are meaningless to a CPA candidate

[jinjuujii]

confusedcandidate:

do we recognize the lower fair value as a loss?

FAR: 2-27-2015

[Katrina]

In this particular case you will noy recognize any of the income because they elected fair value option instead of equity option. You will record $10,000 of gain from increase in value (410 vs 400), and account for 30% of the dividends as income – $6000. The answer is $16,000.

[confusedcandidate]

jinjuujii and zank8925: my understanding is that the loss from the fair value write down nets against the 18000 income and the parent reports 16,000 as income on the income statement, not as a gain per se.

Weekends are meaningless to a CPA candidate

[inviteyou]

I know this is an old post but wanted to add. Per Wiley, since Peabody has elected Fair Value, they should recognize the dividend revenue/income in the period, 6,000 and the increase in the fair value from the initial cost of the investment, 400,000 > 410,000; 6,000 + 10,000 = 16,000.

[DocJ]

I'm just spitballing here, mostly to jog my own memory on the subject:

Fair Value Option = Recognize changes in FV and your share of dividends. This option is available even if you have 0-20% control or 20-50% control. You're prob going to see a handful of questions that mention FV Option, in which case you're gonna wanna adjust the thing to its FV.

Equity Method = Add your share of income and SUBTRACT your share of dividends. This is the default option for 20-50% control (assuming the question doesn't say you elected Fair Value, or if it says no significant influence, like maybe you have 50% control but that means nothing if you can't even get on the board of directors for example). Weird thing is, while your share of their income is ultimately your income, the dividends are NOT accounted for in income. Instead, it's a reduction of your investment. You put in millions, you got influence, you prob voted on big business decisions, so a dividend is basically just you getting back your own money, so why would you count that as income? It was already your money that you put in. So watch out for that.

[Author]

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