Gilman Company purchased 100,000 of the 250,000 shares of common stock of Burke Corporation on January 1, 2010, at $40 per share as a long-term investment. The records of Burke Corporation showed the following on December 31, 2010: At what amount should Gilman Company report the Burke investment on the December 31, 2010 statement of financial position?

Question

Gilman Company purchased 100,000 of the 250,000 shares of common stock of Burke Corporation on January 1, 2010, at $40 per share as a long-term investment. The records of Burke Corporation showed the following on December 31, 2010:  At what amount should Gilman Company report the Burke investment on the December 31, 2010 statement of financial position?

Quizplus · Accepted Answer

In order to determine the correct value to report for the Burke investment on the December 31, 2010 statement of financial position, we need to use the equity method. Under the equity method, the investment is initially recorded at cost and then adjusted each period based on the investor's proportionate share of the investee's income or loss.

In this case, Gilman Company purchased 100,000 shares out of the total 250,000 shares outstanding, which represents a 40% ownership interest (100,000/250,000). Therefore, Gilman Company will need to adjust its investment in Burke Corporation based on its share of Burke's net income for the year.

According to the records of Burke Corporation, the company earned a net income of $70,000 for the year ended December 31, 2010. To calculate Gilman Company's share of this income, we need to multiply the net income by Gilman's ownership percentage:

$70,000 x 40% = $28,000

This means that Gilman Company's investment in Burke Corporation should be increased by $28,000 to reflect its share of the net income. The investment should also be adjusted for any dividends paid by Burke Corporation during the year.

According to the information provided, Burke Corporation did not pay any dividends during the year. Therefore, the total value of Gilman Company's investment in Burke Corporation on the December 31, 2010 statement of financial position should be:

Cost of investment: 100,000 shares x $40 per share = $4,000,000
Add share of net income: $4,000,000 + $28,000 = $4,028,000

However, it is important to note that we also need to consider any other adjustments that may be necessary based on changes in the value of the investee's assets or liabilities during the year. Without additional information, we cannot determine if any of these adjustments are necessary in this case.

Gilman Company Purchased 100,000 of the 250,000 Shares of Common