S House Inc.: Case Study

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The M Industries purchased 6 million shares of S House Inc. common on 3rd January, 2013 for $48 million. With the purchase of shares M Industries started holding 30% interest in the net assets of S House Inc. therefore the company will also earn 30% of net income of S House Inc. along with the amount of dividend declared by M Company at the rate of $1.00 per share on 15th December, 2013. The net income of S House as reported for the year ended 31st December, 2013 was $40 million.

The M Industries is holding 30% of share holding of S House Inc. which means the company has significant influence over the financial and operating policies of the S House Inc. therefore the M Industries should record the investment related transactions on equity …show more content…
The journal entry for recording depreciation on investment on shares is as under:

31st Dec. 2013 Investment Revenue $1 million Investment in S House Shares $1 million (The depreciation on investment recorded)

The increase in fair value is calculated as under:

The fair value of net assets of S House’s Inc. is $20 million excess than the book value of net assets which is $90 million. Therefore the fair value of net assets of S House’s Inc. is $110 million.

The M Industries purchased 30% of net assets therefore the fair value of net assets purchased by M Inc. would be 30% of $110.

The difference between cost of net assets and fair value of net assets is goodwill of $15 and the difference between fair value of net assets of $33 and book value of net assets to M Industries of $27 is undervaluation of assets which is $6.

There will be no entry for increase in fair value of

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