[Anonymous]

I’ve been using Becker to study for FAR and I’ve been doing great answering their questions. However, I recently starting using “cpareviewforfree.com” and I’m starting to feel like I’m not prepared. The questions on the website are a lot more challenging than Becker. I posted an example below…I got this wrong and the website didnt explain it very well. Can someone help?

On January 1, Year One, Large Company paid $18 per share for 20,000 shares of Small Corporation. This investment gave Large 30 percent of the outstanding shares of Small as well as the ability to significantly influence its operating and financing decisions. Small reported a net income of $240,000 during Year One and paid a total cash dividend of $60,000. The fair value of Small’s shares went up by $1 per month over the course of that year. Large elected to use the fair value method to report this investment. What should Large report, as of December 31, Year One, as its Investment in Small?

The answer = $600,000

I thought the answer was $414,000. (360,000 (18 x 20,000) + 72,000 (240,000 x 30%) – 18,000 (60,000 x 30%).

Shouldn’t I be using the equity method as shown above?

Any thoughts? Thanks

[Trevor]

CPA-Stressout, that would be what they want you to do. The question is actually simple… They elected the FAIR VALUE method, which negates the equity method. The investment should then be recorded at FMV wich would be $30/sh (18 @1/1 = $1/mo (12*1)) you purchased 20,000 sh so 20,000*30= $600,000. Make sense??

BEC: 73,81(7/6/2010); AUD: 75(5/24/2010); FAR: 76(8/31/2010); REG: 77 (10/18/2010) - DONE!!!!

[Anonymous]

Thanks Trevor! The fair value method makes sense. They try and trick people all the time. So I hope that anytime I see the fair value method….I take it as simple as possible and negate the equity or cost method.

Thanks and good luck to you =)

[suzzette1]

CPA-stressed-out You can e-mail Joe Hoyle direct to get a more detailed explanations for CPAReviewforfree questions. I would always e-mail him if I need some clarification and he would would respond immediately. Here is his e-mail address Jhoyle@cpareviewforfree.com he is a really great guy.

BEC 2/8/10 - 75 (studied hard & prayed less)
REG 5/15/10 - 88 (studied less but prayed hard)
AUDITING 8/9/10 - 79 (studied hard and prayed hard)
FAR 11/30/10 - 79 (studied hard and prayed hard) Thanks GOD! I'm DONE

[Anonymous]

Oh thank you!!!!! =) whoa he sounds like a great guy…I'll give that a try next time I run into that issue…hopefully it's not too often lol

[Trevor]

Not a problem, that's why we are on the forum right? good luck to you too, that fair value election got me a couple of times too!

BEC: 73,81(7/6/2010); AUD: 75(5/24/2010); FAR: 76(8/31/2010); REG: 77 (10/18/2010) - DONE!!!!

[Author]

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