Question 1

On January 1, Year 1, Investor Co. purchased 30% of Investee Inc. for $600,000, giving it significant influence.
For Year 1, Investee reported Net Income of $100,000 and paid dividends of $20,000.
At year-end, the fair value of the investment was $650,000.
What is the carrying amount of the investment on Investor's balance sheet at December 31, Year 1?

Accepted Answer

Significant Influence (20-50%) -> Equity Method.
Balance = Cost + %NI - %Dividends.
Ignore Fair Value (unless FVO elected, but standard is Equity Method).

Question 2

What mistakes do candidates make on this CPA question?

Accepted Answer

Using Fair Value. Treating dividends as income (that's the Fair Value method/Cost method).

How to approach this question

Full Answer

Common mistakes

Practice the full CPA FAR Practice Exam 3

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