Ane Askeddiehl Company Owns 40% Of The Outstanding Voting Ca

Ane Askeddiehl Company Owns 40 Of The Outstanding Voting Common Stock

Ane Askeddiehl Company owns 40% of the outstanding voting common stock of Rubins Corp and has the ability to significantly influence the investee's operations. On January 3, 20X1, the balance in the investment in Rubins Corp account was $660,000. Amortization associated with this is $15,000 per year. During 20X1, Rubins earned a net income of $150,000 and paid cash dividends of $30,000. Previously in 2010, Rubins had sold inventory costing $42,000 to Diehl for $60,000.

All but 30% of that inventory has been sold to outsiders by Diehl during 20X1. Additional sales were to be made to Diehl in 2011 at a transfer price of $85,000 that had cost Rubins $60,000. Only 16% of the 20X1 purchases had not been sold to outsiders by the end of 20X1.

Paper For Above instruction

The accounting for investments in equity securities depends significantly on the level of influence the investor possesses over the investee. In this scenario, Ane Askeddiehl Company owns 40% of Rubins Corp, indicating a substantial influence rather than control, which is characteristic of equity method accounting. This essay explores the implications of this ownership stake, the impact of intra-group inventory transactions, and the adjustments required for the investment accounts, especially considering the influence of intercompany transactions on financial statements.

Introduction

Investments in equity securities are classified based on the degree of influence an investor has over the investee. Ownership of 20% to 50% generally constitutes significant influence, leading to the use of the equity method for accounting the investment. Such influence allows the investor to participate in policy decisions but not control the operations. This distinction impacts how subsequent income, dividends, and intra-group transactions are reported and consolidated.

Ownership and Influence

Ane Askeddiehl’s 40% ownership stake in Rubins Corp qualifies it as an investor with significant influence. Under the equity method, the initial investment is recorded at cost and subsequently adjusted for the investor’s share of the investee’s net income, dividends received, and other comprehensive income. The initial balance of $660,000 suggests the investment was made at approximate fair value or at a negotiated price, which must be adjusted for intercompany transactions and amortization of fair value adjustments.

Income Recognition and Amortization

During 20X1, Rubins earned net income of $150,000. Ane Askeddiehl’s share of this income is 40%, or $60,000. This amount should increase the carrying amount of the investment, adjusted further for accumulated amortization of $15,000 annually. The amortization may relate to fair value adjustments, such as inventory or other assets acquired in a prior acquisition, impacting the reported net income attributable to the investor.

Dividends and Their Effect on Investment

Dividends paid of $30,000 reduce the carrying amount of the investment under the equity method. However, they do not impact reported net income directly but serve as a return of investment. The journal entry would debit cash and credit the investment account, reflecting reduced investment value.

Intercompany Inventory Transactions

The sale of inventory costing $42,000 to Diehl at a price of $60,000 illustrates intra-group transactions that require adjustment during consolidation. Since all but 30%, or 70%, of this inventory was sold to outsiders during 20X1, a significant portion remains unsold at year-end, requiring the recognition of unrealized profit.

The profit margin on this transaction is computed as ($60,000 - $42,000) / $42,000 = approximately 42.86%. The remaining unsold inventory at year-end—30% of the original inventory—reflects unrealized profit, which must be deferred to avoid overstating income. The unrealized profit included in ending inventory is $12,600 (30% of $42,000 profit), and this amount should be eliminated from the consolidated income statement to present true profit figures.

Subsequent Purchases and Inventory Unsold

Additional sales of $85,000 at a cost of $60,000 proceed within the intra-group cycle. Because only 16% of these purchases remained unsold, the remaining 84% should be considered sold to outsiders, with only the unsold portion requiring adjustment for unrealized profit. The unrealized profit in inventory from these transactions is calculated as 16% of the profit margin, which influences the consolidation adjustments.

Conclusion

The consolidation of financial statements involving investments with significant influence necessitates precise adjustments, especially regarding intra-group transactions. Recognizing unrealized profits in inventory ensures accurate representation of the economic reality. The equity method’s application involves adjusting the investment account for share of net income and dividends, incorporating amortization related to fair value adjustments. These accounting procedures collectively provide a transparent and accurate picture of an investor’s financial position and results.

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