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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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Equity Method On January 1, 2019, Field Company acquired 40% of North Company by purchasing 8,000 shares for $144,000 and obtained significant influence. On the date of acquisition, Field calculated that its share of the excess of the fair value over the book value of North’s depreciable assets was $15,000 and that the purchased goodwill was $12,000. At the end of 2019, North reported net income of $45,000 and paid dividends of $0.70 per share. Field depreciates its depreciable assets over a 12-year remaining life.

Required:

  1. 1. Prepare all the journal entries of Field to record the preceding information for 2019.
  2. 2. Next Level What is the conceptual justification for the use of the equity method?

1.

To determine

Record the journal entries in the books of Company F for 2019.

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 F for 2019.

</
DateAccount Title and Explanation Debit Credit 
January 1, 2019Investment in Stock: Company N$144,000 
 Cash $144,000
 (To record the purchase of 40% shares of Company N)  
    
December 31, 2019Investment in Stock: Company N$18,000 
 Investment income ($45,000×0.40) $18,000
 (To record the income earned from investment)  
    
December 31, 2019Investment income ($15,00012 years)$1,250 

2.

To determine

Explain the conceptual justification for the use of the equity method.

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