Company F purchased 40% of the outstanding stock of company K on June 30, 20XX. Both of the companies have a December 31st, year end. Company K is a publicly traded company and reports its net income to company F. Company K also pays a hefty dividend to the shareholders of company F. How should company F report the above facts on its December 31, 20XX balance sheet and income statement

Answer and Explanation:

Within the U.S. GAAP, Company F is an owner owning greater than 20 percent but smaller than or equivalent to 50 percent of Company K's stock and is thus considered to have the right to exercise considerable control on Company K's financial affairs.

According to the GAAP, there is nothing exist explicit information that there is no substantial impact.

Company F will use the EQUITY method to compensate for all assets in the 20 to 50 percent ownership range.

Within this approach,

Business F will pass the following journal entry on the purchase of shares in K:

Particulars                               Debit                     Credit

Investment In K Dr,              XXXXXX

           To Cash                                                    XXXXXX

(Being cash paid is recorded)

For recording this we debited the investment as it increased the assets and credited the cash as it decreased the assets

If Company K declares net income in Dec 20XX, Company F will instantly recognize its share of income for the proportionate period of keeping the 40 percent (that is 6 months net income) by way of a journal entry is shown below: (Total net income of K × 40 percent × 6 ÷ 12)

Particulars                               Debit                     Credit

Investment in K Dr,                XXXXXX

           To Investment Income -Co. K                   XXXXXX

(Being the investment is recorded)

For recording this we debited the investment as it increased the assets and credited the investment income as it also increased the income

If Company K pays dividends to company owners F

The investment account reduces by the amount of cash dividend earned, and the below entry must be passed on to F's books:

Particulars                               Debit                     Credit

Cash Dr,                                  XXXXXX

        To Investment in K                                      XXXXXX

(Being the cash is recorded)

For recording this we debited the cash as it increased the assets and credited the investment as it decreased the assets

Once Company F sells shown above investment it makes a clear entry:

Particulars                               Debit                     Credit

Cash Dr,                                  XXXXXX

       To Investment in K                                        XXXXXX

(Being the cash is recorded)

For recording this we debited the cash as it increased the assets and credited the investment as it decreased the assets

The investment carrying value come by

= Purchase price + Net income accrued - Dividends received

Any balance shall be debited in respect of losses on the selling of investment in K-equity securities or  Credited to Investment in K -Equity Securities Gain on Sale

So this amount of investment in other companies' equity (40 percent), includes forwarding the above-mentioned journal entries, in the buying company's accounts.  

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