Phillips Company bought 30 percent ownership in Jones Bag Company on January 1, 20X1, at underlying book value. During the period of January 1, 20X1, through December 31, 20X3, the market value of Phillips' investment in Jones' stock increased by $1,500 each year. In 20X1, 20X2, and 20X3, Jones Bag reported the following:

Year Net Income Dividends
20X1 $8,000 $15,000
20X2 12,000 10,000
20X3 20,000 10,000

The balance in Phillips Companyâs investment account on December 31, 20X3, was $54,000.

Required
In each of the following independent cases, determine the amount that Phillips paid for its investment in Jones Bag stock assuming that Phillips accounted for its investment using the ( a ) cost method and ( b ) equity method.

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Tundexi Tundexi · Answer 1 · 2021-06-08T02:54:22+02:00

Answer:

1. Fair value

Particulars Amount$

Investment on December 31,20X3 54,000

Less: Increase for 20X1 -1,500

Less: Increase for 20X2 -1,500

Less: Increase for 20X3 -1,500

Amount that phillips paid for Investment $49,500

2. Equity Method

Particulars Amount$

Investment on December 31, 20X3 54,000

Add: Dividend share for 20X1 4,500 (15000*30%)

Add: Dividend share for 20X2 3,000 (10000*30%)

Add: Dividend share for 20X3 3,000 (10000*30%)

Less: Net Income share for 20X1 -2,400 (8000*30%)

Less: Net Income share for 20X2 -3,600 (12000*30%)

Less: Net Income share for 20X3 -6,000 (20000*30%)

Amount that phillips paid for Investment $52,500