Chapter 3, Problem 1UTI

To determine

There is various method of calculating Parent company’s investment balance at the end of the first year. Some are

• Simple Equity Method
• Sophisticated Equity Method
• Cost Method

To Calculate

Amount of investment in subsidiary company at the end of first year with various method.

Answer to Problem 1UTI

Particulars	Simple equity method	Sophisticated equity method	Cost method
Investment in subsidiary company	$\$5,35,000$	$\$5,28,000$	$\$5,00,000$

Explanation of Solution

As the Parent company purchased $100\%$ common stock of Subsidiary company for $\$5,35,000$ , $\$5,28,000$ , and $\$5,00,000$ under the method of Simple equity method , Sophisticated method and Cost method.

Calculation of Amortization amount per year

As per the information given in the question equipment is undervalued by $\$70,000$ which has a life of $10$ .

  $\begin{array}{c}\text{Amortization Per year=}\frac{\text{Understated/ Overstated Value of Assets}}{\text{Life of the assets}}\\ =\frac{\$70,000}{10}\\ =\$7,000\text{Per year}\end{array}$

So investment value in subsidiary is

Particulars	Simple equity method	Sophisticated equity method	Cost method
Investment in subsidiary company	$\$5,35,000$	$\begin{array}{l}\$5,28,000\\ \left(\$5,00,000+\$40,000-\$7,000-\$5,000\right)\end{array}$	$\$5,00,000$
	-	In this method also subsidiary income is also considered while calculating investment balance at the end of first year	For cost method only parent company income and investment.

Conclusion:

Particulars	Simple equity method	Sophisticated equity method	Cost method
Investment in subsidiary company	$\$5,35,000$	$\$5,28,000$	$\$5,00,000$