On January 1, 2022 Company A (CA) held 90% of the 4,000 outstanding shares of Company B
Question:
On January 1, 2022 Company A (CA) held 90% of the 4,000 outstanding shares of Company B (CB). The shareholders' equity section of the balance sheet of CB contained the following account balances at that date:
Common shares $ 20,000 Retained earnings 70,000
CA uses the equity method to account for its investment in CB in its financial records but prepares consolidated financial statements for its shareholders. The balance in the investment account was $126,000 at January 1, 2022. The unamortized acquisition differential relates entirely to a patent with a remaining life of 10 years at January 1, 2022.
On July 1, 2022 CA sold 720 of its shares of CB to an unrelated party for $30 per share. During 2022 CB had net income of $20,000, earned evenly throughout the year, and declared dividends of $5,000 at the end of 2022.
On December 31, 2023 CB issued 500 new shares to an unrelated party for $46 per share. At this time the balance in the investment account was $118,800.
Required:
Calculate the changes in CA's investment in CB for the 2022 and 2023 transactions. Explain clearly how the changes will be accounted for by CA. Journal entries are not required.