[sallytong]

Hi everyone, I have a cost method/equity question from Becker. o(∩_∩)o

Jan 1, year1 , B paid $20000 for a 15% interest in S. The BV of the net assets was $120000. Any excess is a building with 40 year life. NI by S was $35000. B’s share of dividends $750. The market value of investment was $17000 on Dec,31,year 1.

Jan1, yaer 2. B increase its onwnership in S to 50%, paying $60000. The FV and BV of S net assets at Jan1, year2 were $108000. On Jan1, year2 ,B would record additional investment and make adjustments to retroactively convert from cost method to equity method.

building:20000-18000=2000 2000/40=50 (amortization)

Equity method: 20000

+5250 (35000*15%)

-750 (dividend)

-50 (amortization)

=24450

cost method 17000

difference=24450-17000

=7450

-3000 (adjustment to unrealized loss on available-for-sale securites) ???

=4450 (retrospective adjustment to RE)

Journey Entry: Investment in S 7450

R/E 4450

Unrealized loss on available for sale securities 3000

Investment in S 60000

Cash 60000

Can anyone help me explain where is the $3000 come from? How to calculate it ? Thank you very much.

[JeremiahFletcher]

Looking at it, its the difference between the purchase price and the end of year value, because they should have recorded P&L impact for the $3,000 loss that they had in year 1, because there was already a loss in Y1, that had to be factored into the adjustment.

AUD - 92
BEC - 89
REG - 86
FAR - 92
One and done!

[Author]

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