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Chapter 12: Q20. (page 610)

Raleigh Corp. has an investment with a carrying value (equity method) on its books of \(170,000 representing a 30% interest in Borg Company, which suffered a \)620,000 loss this year. How should Raleigh Corp. handle its proportionate share of Borg’s loss?

Short Answer

Expert verified

In this situation, Raleigh corporation does not need any amount of loss that exceeds the amount of $170,000.

Step by step solution

01

Definition of carrying value

Carrying value means the value of the asset that the company uses. Carrying value shows the value of the amount invested in a company.

02

Handling of shares

In this case, Raleigh Corp is not liable to pay any loss that exceeds the carrying value of the investment. In this, the carrying value of the Raleigh investment is 170,000 for 30% interest. Hence, Raleigh Corp. is not liable to pay more than 170,000. There is only one case in which Raleigh Corp. is liable to pay its share of 30% loss. It only arises when Raleigh Corp. promises Borg Company to give them financial support. In this case, Raleigh is liable to pay 30% of the loss, which amounts to 186,000.

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Most popular questions from this chapter

Why does the accounting profession make a distinction between internally created intangibles and purchased intangibles?

Question: Waters Corporation purchased Johnson Company 3 years ago and at that time recorded goodwill of \(400,000. The Johnson Division’s net assets, including the goodwill, have a carrying amount of \)800,000. The fair value of the division is estimated to be $1,000,000. Prepare Waters’ journal entry, if necessary, to record impairment of the goodwill.

(Accounting for Pre-Opening Costs) After securing lease commitments from several major stores, Auer Shopping Center, Inc. was organized and built a shopping center in a growing suburb.

The shopping center would have opened on schedule on January 1, 2017, if it had not been struck by a severe tornado in December. Instead, it opened for business on October 1, 2017. All of the additional construction costs that were incurred as a result of the tornado were covered by insurance.

In July 2016, in anticipation of the scheduled January opening, a permanent staff had been hired to promote the shopping center, obtain tenants for the uncommitted space, and manage the property.

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2016

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Instructions

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