3. What is the investment in Two Company common stock at year-end? 4. What is the recovery of market decline to be reported in the income statement?
On December 31, 2020, Dreamer Company reported as Available-for-sale securities:
AT Company, 5,000 shares of common stock (a 1% interest) P 125,000
ITS Company, 10,000 shares of common stock (a 2% interest) 160,000
Two Company, 25,000 shares of common stock (a 10% interest) 700,000
Marketable equity securities, at cost P 985,000
Less: Valuation allowance 50,000
Marketable equity securities, at market P 935,000
Additional information:
· On May, 2021, AT Company issued a 10% stock dividend when the market price of its stock was P24 per share.
· On November 1, 2021, AT Company paid a cash dividend of P0.75 per share.
· On August 5, 2021, ITS Company issued to all shareholders, stock rights on the basis of one right per share. Market prices at date of issue were P13.50 per share (ex-right) of stock and P1.50 per rights. Dreamer Company sold all rights on December 16, 2021 for net proceeds of P18,800.
· On July 1, 2021, Dreamer Company paid P1,520,000 for 50,000 additional shares of Two Company’s common stock which represented a 20% investment in Two Company. The fair value of all of the Two Company’s identifiable assets net of liabilities was equal to their carrying amount of P6,350,000. As a result of this transaction, Dreamer Company owns 30% of Two Company and can exercise significant influence over Two Company’s operating and financial policies.
· Dreamer Company’s initial 10% interest of 25,000 shares of Two Company’s common stock was acquired on January 2, 2020 for P700,000. At that date, the net assets of Two Company totaled P5,800,000 and the fair value of Two’s identifiable assets net of liabilities was equal to their carrying amount.
· Market prices per share of the marketable equity securities which were all listed in the stock exchange, were as follows: At December 31
, 2 0 20 2 0 21
AT Company - common P 22 P 23
ITS Company – common 15 14
Two Company – common 27 29
· Two Company reported net income and paid dividends of:
Year Ended Div. per Share
Year ended December 31. 2020 P350,000 none
Six months ended June 30, 2021 200,000 none
Six months ended December 31, 2021 370,000 P 1.30 (dividend was paid on 10/1/21)
· There were no other intercompany transactions between Dreamer Company Two Company and there were no impairment of Two Company’s asset at yearend.
Requirement:
3. What is the investment in Two Company common stock at year-end?
4. What is the recovery of market decline to be reported in the income statement?
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