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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

Franklin Corp. has a debt investment that it has held for several years. When it purchased the debt investment, Franklin classified and accounted for it as an available-for-sale. Can Franklin use the fair value option for this investment? Explain.

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Question: Michek Company loans Sarasota Company \(2,000,000 at 6% for 3 years on January 1, 2017. Michek intends to hold this loan to maturity. The fair value of the loan at the end of each reporting period is as follows.

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