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On January 1, 2019, Spring Co
On January 1, 2019, Spring Co. purchased a 30% interest in Fall Inc. for $600,000. For the year ended December 31, 2019, Fall reported net income from operations of $75,000 and a gain from discontinued operations of $10,000 (net of tax). Fall paid dividends of $12,500 on December 31, 2019. Assume that Spring uses the equity method to account for its investment in Fall. Which of the following is the amount that would be reported on Spring's 2019 income statement relating to Fall? Multiple Choice Investment income of $19,250 and investment loss, discontinued operations of $3,500. Investment income of $19.750. (0) Dividend revenue of $2,975 Investment income of $22,500 and investment gain, discontinued operations of $3,000.
Expert Solution
When an investor acquires 20% or more of the voting stock of an investee, it is presumed that, without evidence to the contrary, that an investor maintains the ability to exercise significant influence over the investee. Conversely, when an ownership position is less than 20%, there is a presumption that the investor does not exert significant influence over the investee unless it can otherwise demonstrate such ability.
When Spring Co makes the purchase, it records its investment under “Investments in Associates/Affiliates”, a long-term asset account. The transaction is recorded at cost.
Dr. Investments in Associates 600000
Cr. Cash 600000
Spring Co receives dividends of $3750, which is 30% of $12500and records a reduction in their investment account. The reason for this is that they have received money from their investee. In other words, there is an outflow of cash from the investee, as reflected in the reduced investment account.
| Dr. | Cash | 3750 | |
| Cr. | Investments in Associates |
3750 |
Finally, Spring Co records the net income from Fall Inc as an increase to its Investment account.
| Dr. | Investments in Associates | 22500 |
| Cr. | Investment Revenue 22500 |
Similarly Investment gain from discontinued operations also recorded i.e 30000
By considering all of the above option D is correct
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