Question
31. An investor purchases a 30% interest in an investee company, and the investor concludes that it can exert significant influence over the investee. The
31. An investor purchases a 30% interest in an investee company, and the investor concludes that it can exert significant influence over the investee. The book value of the investees Stockholders Equity on the acquisition date is $400,000, and the investor purchases its 30% interest for $156,000. The investor is willing to pay the purchase price because the investee owns an unrecorded (internally developed) patent that the investor estimates is worth $120,000. The patent has a remaining useful life of 10 years. Subsequent to the acquisition, the investee reports net income of $90,000, and pays a cash dividend to the investor of $13,000. At the end of the first year, the investor sells the Equity Investment for $195,000. Prepare all of the required journal entries to account for this Equity Investment during the year.
32. Assume that an investor has accounted for a $320,000 cost, 8% investment in the investee using the fair value method (available-for-sale designation). The following additional information is available:
Cumulative Dividends Received from Investee $37,500
8% of the Cumulative Profits Recorded by Investee $98,300
Cumulative Fair Value Adjustment for 8% Interest $117,600
Now, assume that the investor acquires an additional 17% interest in the investee (bringing the total to 25%) and concludes that it can now exert significant influence over the investee.
a. Provide the required journal entries to account for the change from the fair value method to the equity method for the original investment.
b. Now, assume that the investor has accounted for its investment using the cost method. Provide the required journal entries to account for the change from the cost method to the equity method for the original investment.
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