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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 and Subsequent Sale On January 1, 2019, Easton Corporation acquired 30% of the outstanding common shares of Feeley corporation for $140,000, purchased 25% of the outstanding common shares of Holmes Company for $82,500, and obtained significant influence in both situations. On this date, the financial statements of Feeley and Holmes disclosed the following information:

Chapter 13, Problem 20P, Equity Method and Subsequent Sale On January 1, 2019, Easton Corporation acquired 30% of the

During 2019, Feeley reported a loss of $70,000 and paid dividends of $40,000; Holmes reported income of $45,000 and paid dividends of $28,000. On January 1, 2020, Easton sold all the Holmes shares for $90,000. Assume Easton records both investments under the equity method and considers that any difference between each purchase price and the respective book value of the net assets acquired is goodwill.

Required:

Prepare journal entries to record (1) the purchase of the Feeley and Holmes shares, (2) the recognition of investment income, (3) the receipt of investee dividends, and (4) the sale of the Holmes shares.

To determine

Prepare journal entries in the books of Corporation E.

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.

  1. 1) Prepare the journal entry to record the purchase of the Corporation F’s and corporation H’s shares.
DateAccount Title and Explanation Debit Credit 
January 1, 2019Investment in Stock: Corporation F$140,000 
 Cash $140,000
 (To record the purchase of 30% shares of Corporation F)  
    
January 1, 2019Investment in Stock: Company H$82,500 
 Cash $82,500
 (To record the purchase of 25% shares of Company H)  

Table (1)

  1. 2) Prepare the journal entry to record the recognition of investment income.
DateAccount Title and Explanation Debit Credit 
2019Investment loss ($70,000×0.30)$21,000 
 Investment in Stock: Corporation F $21,000
 (To record the loss on investment)  
    
2019Investment in Stock: Company H$11,250 
 Investment income ($45,000×0.25) $11,250
 (To record the income earned from investment)  

Table (2)

  1. 3) Prepare the journal entries to record the receipt of investee dividends

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