Gunter Company acquires a 25% interest in Hunter Company. The fair value of Hunter's inventory exceeds its book value by $40,000. During the subsequent year, the inventory is sold. As a result of the sale of inventory, investment revenue would:

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7 September, 10:41

Gunter Company acquires a 25% interest in Hunter Company. The fair value of Hunter's inventory exceeds its book value by $40,000. During the subsequent year, the inventory is sold. As a result of the sale of inventory, investment revenue would:

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Gordon Potter · Answer 1

Increase

Explanation:

Note: The given answer is based upon the assumption that the inventory is sold at fair market value.

In the given case, Hunter company would be termed as an "associate" since the quantum of investment of Gunter in Hunter is more than 20% but less than 50%.

Profits earned by Hunter also belong to the Hunter company in proportion to the percentage of investment held, which would comprise of it's cost of control or added to it's own income as per the case.

In the given case, the difference between fair value and book value reflects profit. Gunter's share in such profits shall be added to it's investment revenue which would increase it's investment revenue.