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Intermediate Accounting: Reporting...

3rd Edition
James M. Wahlen + 2 others
ISBN: 9781337788281

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BuyFindarrow_forward

Intermediate Accounting: Reporting...

3rd Edition
James M. Wahlen + 2 others
ISBN: 9781337788281
Textbook Problem
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Application of Equity Method On January 1, 2019, Doe Company purchased 3,000 of the 10,000 common shares outstanding of Ray (Company for $15 per share and obtained significant influence. Doe amortizes its patents over 10 years. Ray’s December 31, 2018, condensed balance sheet is shown here:

Chapter 13, Problem 18P, Application of Equity Method On January 1, 2019, Doe Company purchased 3,000 of the 10,000 common , example  1

Doe was unable to determine the fair value of Ray’s identifiable net assets shown on the preceding balance sheet. It did, however, determine that Ray uses the straight-line method (no residual value) to depreciate its fixed assets and to amortize its patents over 20 years and 10 years, respectively. At the end of 2019, Ray disclosed the following condensed income statement and retained earnings statement for 2019:

Chapter 13, Problem 18P, Application of Equity Method On January 1, 2019, Doe Company purchased 3,000 of the 10,000 common , example  2

Required:

Prepare all the 2019 journal entries that Doc should make related to this investment. Show and label all supporting calculations.

To determine

Record the journal entries in the books of Company D related to the investment.

Explanation

Investment: It refers to the process of using the currently held excess cash to earn profitable returns in future. The investments can be made in equity securities such as shares or debt securities such as bonds.

Record the journal entries in the books of Company D related to the investment.

DateAccount Title and Explanation Debit Credit 
January 1, 2019Investment in Stock: Company R$45,000 
         Cash ($15×3,000) $45,000
 (To record the purchase of 30% shares of Company R)  
    
December 31, 2019Investment in Stock: Company R$9,600 
 Investment income ($32,000×0

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