contestada

On January 1, 2018, Jordan Inc. acquired 30% of Nico Corp. Jordan used the equity method to account for the investment. On January 1, 2019, Jordan sold two-thirds of its investment in Nico. It no longer had the ability to exercise significant influence over the operations of Nico. How should Jordan account for this change?

A) Jordan should continue to use the equity method to maintain consistency in its financial statements.
B) Jordan should use the fair-value method for 2019 and future years, but should not make a retrospective adjustment to the investment account.
C) Jordan has the option of using either the equity method or the fair-value method for 2018 and future years.
D) Jordan should report the effect of the change from the equity to the fair-value method as a retrospective change in accounting principle.
E) Jordan should restate the prior years' financial statements and change the balance in the investment account as if the fair-value method had been used since 2018.

Respuesta :

Answer:

B) Jordan should use the fair value method for 2019 and future years, but should not make retrospective adjustment to investment account

Explanation:

When a company acquires more than 20% but less than 50% stake in another company, such company should be referred to as an associate.

The date on which such control is acquired, goodwill/capital reserve is calculated.

If cost of investments is greater than the company's share in subsidiary's share capital, such excess is attributable to Goodwill. Similarly, for vice versa scenario, it shall be termed as capital reserve.

In the given case, Jordan acquired 30% stake on Jan 1, 2018 and subsequently disposed off 20% stake on Jan 1, 2019. So for the year 2018, Jordan was an associate and should've accounted on equity basis i.e dividends received from it's subsidiary being credited to income statement and Goodwill/Capital reserve being reported.

For the year 2019, Jordan will not be considered an associate  since it no longer holds more than 20% stake and thus, it should use fair value as basis for valuation of it's investments.

Otras preguntas