Asked by Gisell Garcia on Jun 25, 2024
Verified
Selectron Inc. acquired 60% of Insor Inc. on January 1, 2019 for $180,000, when Insor's Common Shares and Retained Earnings were worth $60,000 and $180,000 respectively. Insor's fair values approximated their book values on that date. Selectron currently uses the Equity Method to account for its investment in Insor.
During 2019, investment income in the amount of $12,000 and dividends in the amount of $1,200 were recorded in Selectron's Investment in Insor account. During 2020, investment income in the amount of $24,000 and dividends in the amount of $2,400 were recorded in Selectron's Investment in Insor account. Insor declares dividends in the amount of 10% of its earnings.
Required:
a) Compute Insor's net income for 2019 and 2020.
b) Compute the amount of dividends declared by Insor in each year.
c) Compute the balance in the non-controlling interest account as at December 31, 2020.
Non-Controlling Interest
A stake in a company that is not large enough to control company decisions, representing ownership by minority shareholders in a subsidiary not wholly owned by the parent.
Equity Method
An accounting technique used to record investments in other companies, where the investment is initially recorded at cost and adjusted thereafter for the investor's share of the investee's profit or losses.
Dividends
Payments made by a corporation to its shareholder members, usually derived from the company's profits.
- Absorb the fundamentals of the Equity Method as it pertains to accounting for investments.
- Ascertain cumulative retained income and discern the influence of dividend payments.
- Determine the non-controlling interest figures on the consolidated balance sheet.
Verified Answer
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Final Answer :
a) Insor's Net Income for 2019 and 2020 had to be $20,000 and $40,000 respectively.
Insor's Net Income for 2019 is calculated as follows:
2019 Net Income flowing through investment account = $12,000;
$12,000/60% = $20,000
Insor's 2020 net income would be calculated in the same manner, and would be $40,000.
b) Dividends, 2019 = $20,000 10 % = $2,000 (or $1,200/60%) Dividends, 2020 = $4,000.
c) Non-Controlling Interest:
Fair value of Insor at date of acquisition: $300,000 Add: 2019 Net Income $20,000 Less: 2019 Dividends ($2,000) Add: 2020 Net Income $40,000 Less: 2020 Dividends ($4,000) Book value of Insor, December 31,2020$354,000 Non-Controlling Interest (40%)$141,600\begin{array}{|l|r|}\hline \text { Fair value of Insor at date of acquisition: } & \$ 300,000 \\\hline \text { Add: } 2019 \text { Net Income } & \$ 20,000 \\\hline \text { Less: } 2019 \text { Dividends } & (\$ 2,000) \\\hline \text { Add: } 2020 \text { Net Income } & \$ 40,000 \\\hline \text { Less: } 2020 \text { Dividends } & (\$ 4,000) \\\hline \text { Book value of Insor, December } 31,2020 & \$ 354,000 \\\hline \text { Non-Controlling Interest }(\mathbf{4 0} \%) & \$ 141,600 \\\hline\end{array} Fair value of Insor at date of acquisition: Add: 2019 Net Income Less: 2019 Dividends Add: 2020 Net Income Less: 2020 Dividends Book value of Insor, December 31,2020 Non-Controlling Interest (40%)$300,000$20,000($2,000)$40,000($4,000)$354,000$141,600
Insor's Net Income for 2019 is calculated as follows:
2019 Net Income flowing through investment account = $12,000;
$12,000/60% = $20,000
Insor's 2020 net income would be calculated in the same manner, and would be $40,000.
b) Dividends, 2019 = $20,000 10 % = $2,000 (or $1,200/60%) Dividends, 2020 = $4,000.
c) Non-Controlling Interest:
Fair value of Insor at date of acquisition: $300,000 Add: 2019 Net Income $20,000 Less: 2019 Dividends ($2,000) Add: 2020 Net Income $40,000 Less: 2020 Dividends ($4,000) Book value of Insor, December 31,2020$354,000 Non-Controlling Interest (40%)$141,600\begin{array}{|l|r|}\hline \text { Fair value of Insor at date of acquisition: } & \$ 300,000 \\\hline \text { Add: } 2019 \text { Net Income } & \$ 20,000 \\\hline \text { Less: } 2019 \text { Dividends } & (\$ 2,000) \\\hline \text { Add: } 2020 \text { Net Income } & \$ 40,000 \\\hline \text { Less: } 2020 \text { Dividends } & (\$ 4,000) \\\hline \text { Book value of Insor, December } 31,2020 & \$ 354,000 \\\hline \text { Non-Controlling Interest }(\mathbf{4 0} \%) & \$ 141,600 \\\hline\end{array} Fair value of Insor at date of acquisition: Add: 2019 Net Income Less: 2019 Dividends Add: 2020 Net Income Less: 2020 Dividends Book value of Insor, December 31,2020 Non-Controlling Interest (40%)$300,000$20,000($2,000)$40,000($4,000)$354,000$141,600
Learning Objectives
- Absorb the fundamentals of the Equity Method as it pertains to accounting for investments.
- Ascertain cumulative retained income and discern the influence of dividend payments.
- Determine the non-controlling interest figures on the consolidated balance sheet.