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Accounting

27th Edition
WARREN + 5 others
ISBN: 9781337272094

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BuyFindarrow_forward

Accounting

27th Edition
WARREN + 5 others
ISBN: 9781337272094
Textbook Problem

Equity method for stock investment with loss

On January 6, Year 1, Bulldog Co. purchased 34% of the outstanding stock of Gator Co. for $212,000. Gator Co. paid total dividends of $24,000 to all .shareholders on June 30. Gator had a net loss of $56,000 for Year 1.

a. Journalize Bulldog's purchase of the stock, receipt of the dividends, and the adjusting entry for the equity loss in Gator Co. stock.

b. Compute the balance of Investment in Gator Co. Stock on December 31, Year 1.

c. How does valuing an investment under the equity method differ from valuing an investment at fair value?

(a)

To determine

Equity investment: Equity investments are stock instruments which claim ownership in the investee company and pay a dividend revenue to the investor company.

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.

Journal entry: Journal entry is a set of economic events which can be measured in monetary terms. These are recorded chronologically and systematically.

Debit and credit rules:

  • Debit an increase in asset account, increase in expense account, decrease in liability account, and decrease in stockholders’ equity accounts.
  • Credit decrease in asset account, increase in revenue account, increase in liability account, and increase in stockholders’ equity accounts.

To journalize: The stock investment transactions for Company B, under the equity method

Explanation

Prepare journal entry for the purchase of 34% of stock of Company G for $212,000.

Date Account Titles and Explanations Post. Ref. Debit ($) Credit ($)
January 6 Investment in Company G Stock   212,000  
             Cash     212,000
    (To record purchase of shares of Company G for cash)      

Table (1)

Explanation:

  • Investment in Company G Stock is an asset account. Since stock investments are purchased, asset value increased, and an increase in asset is debited.
  • Cash is an asset account. Since cash is paid, asset account decreased, and a decrease in asset is credited.

Prepare journal entry for dividends received from Company G.

Date Account Titles and Explanations Post. Ref. Debit ($) Credit ($)
June 30 Cash   8,160  
           Investment in Company G Stock     8,160
    (To record dividends received from Company G)      

Table (2)

Explanation:

  • Cash is an asset account. Since cash is received, asset account increased, and an increase in asset is debited.
  • Investment in Company G Stock is an asset account. Since stock investments are reduced as an effect of receipt of dividends, asset value decreased, and a decrease in asset is credited.

Working Notes:

Compute amount of dividend received from Company G...

(b)

To determine
The stock investment balance for Company B

(c)

To determine

To discuss: The differences between valuation of investment under equity method and fair value method

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