Question

Judd, Inc., owns 35% of Cosby Corporation. During the calendar year 2021, Cosby had net earnings of $300,000 and paid dividends of $30,000. Judd mistakenly recorded these transactions using the fair value method rather than the equity method of accounting. What effect would this have on the investment account, net income, and retained earnings, respectively

Answer 1

The right approach is "Understate, understate, understate".

Step-by-step explanation:

• The equity approach considers the substantive contractual partnership amongst two companies, Judd Inc. as well as Cosby Company. The creditor reports its share of the creditor's earnings as taxable net profit after tax underneath the equity instruments. For illustration, whenever a corporation owns 35 percent of a corporation with such a net gain of $300,000, by the equity system, the organization records profits from its acquisition of $105,000.

Since Judd Inc. using the equal value approach, the net sales were significantly underestimated by $105,000,000.

• Throughout the Equity Process, Judd Inc. will also have recorded as debit cash as well as compensation in almost the same proportion as "Investment throughout COSBY" throughout the quantity of $10,500. The debit to something like the capital expenditure raises the value including its commodity, while it reduces the compensation to either the investment.
• Consolidated interest income is indeed a part including its number of shares outstanding on something like consolidated financial statements that symbolizes the relative's accumulated revenues. It corresponds to the interest expense of parent JUDD Inc. exclusively itself from its earnings vary its communication of the net income of joint venture COSBY.

As Judd did not report the entrance that uses the equity process, retained earnings would also be understated by this.