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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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Recording Investments under the Equity Method Harper Corporation acquired 80,000 of the 200,000 outstanding shares of Moore Corporation on April 1, 2019, for $400,000 and obtained significant influence. The following information concerning Moore is available on the date of acquisition:

Chapter 13, Problem 19P, Recording Investments under the Equity Method Harper Corporation acquired 80,000 of the 200,000

Subsequently, Moore paid a cash dividend of $40,000 on August 31, 2019, and reported net income of $155,000 on December 31, 2019.

Required:

  1. 1. Prepare journal entries for Harper to record the preceding information.
  2. 2. What is the balance in Harper’s investment account on December 31, 2019? Show all computations.
  3. 3. Prepare Harper’s net cash flow from operating activities section of its 2019 statement of cash flows under the indirect method, assuming Harper reported $200,000 of net income. Ignore income taxes.

1.

To determine

Prepare the journal entries in the books of Corporation H.

Explanation

Equity method: Equity method is the method used for accounting equity investments which claim a significant influence of above 20% but less than 50% in the outstanding stock of the investee company.

Record the purchase of Corporation M’s 80,000 shares of 200,000 outstanding shares:

DateAccount Title and Explanation Debit Credit 
April 1, 2019Investment in Stock: Corporation M$400,000 
 Cash $400,000
 (To record the purchase of 40% shares of Corporation M)  

Table (1)

Record the receipt of dividend.

DateAccount Title and Explanation Debit Credit 
August 31, 2019Cash$16,000 
 Investment in Stock: Corporation M (0.40×$40,000) $16,000
 (To record the receipt of cash dividend)  

Table (2)

Record the income from investment.

DateAccount Title and Explanation Debit Credit 
December 31, 2019Investment in Stock: Corporation M$46,500 
 Investment income (1) $46,500
 (To record the income earned from investment)  

Table (3)

Working note (1):

Calculate the amount of investment income.

Investement income= [(Annual income from operations + Extraordinaryincome as on December 31, 2019)×Percentage of Company R's common stocksacquired by Company D&

2.

To determine

Calculate the balance in the Corporation H’s investment account on December 31, 2019.

3.

To determine

Prepare the net cash flow from operating activities section of the cash flow statement under the indirect method for Corporation H.

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