Question

(Equity Investment) On July 1, 2017, Selig Company purchased for cash 30% of the outstanding commonstock of Spoor Corporation. Both Selig and Spoor have a December 31 year-end. Spoor Corporation, whose common stock isactively traded on the NASDAQ exchange, paid a cash dividend on November 15, 2017, to Selig Company and its other stockholders.

It also reported its total net income of $920,000 to Selig Company.

Instructions

Prepare a one-page memorandum of instructions on how Selig Company should report the above facts in its December 31, 2017balance and its 2017 income statement. In your memo, identify and describe the method of valuation you recommend.

Provide rationale where you can. Address your memo to the chief accountant at Selig Company

Short answer

Share in the net income is calculated by multiplying share in the company to total net income.

Step-by-step solution

Definition of equity investment

Equity investment is a type of investment in which holders of the investment are known as the company’s owners.

Memorandum of instructions

First of all, the company should report the amount of the dividend received in the income statement under other income.

After reporting the dividend now, the reporting of the investment income is done by the company. First of all, the company needs to calculate their share in the net income.

To calculate the share in the net income, the company multiplies their share in the company by its net income. By applying this, the amount of share is found out. After this, the investment revenue is recorded under the head of shareholder’s equity.

For this, they should need to adopt the equity method for valuation because this method is the most accurate valuation method.