Question
Hope Company bought 30% of Faith Corporation in the beginning of 2021. Hope's purchase price of $3,000,000 equaled 30% of the book value of Faith's
Hope Company bought 30% of Faith Corporation in the beginning of 2021. Hope's purchase price of $3,000,000 equaled 30% of the book value of Faith's net identifiable assets, which also equaled 30% of the fair value of Faith. During 2021, Faith reported net income in the amount of $4,000,000 and declared and paid dividends in the amount of $300,000. At the end of 2021, Faiths fair value was $12,000,000. Hope mistakenly accounted for the investment using the fair value through net income method instead of using the equity method. What effect would this error have on the investment account and net income, respectively, for 2021?
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