Question
An investor owns 25% of an investee, and accounts for its investment using the equity method. At the beginning of the year, the Equity Investment
An investor owns 25% of an investee, and accounts for its investment using the equity method. At the beginning of the year, the Equity Investment was reported on the investor's balance sheet at $1,500,000. During the year, the investee reported net income of $600,000 and paid dividends of $150,000. In addition, the investor sold inventory to the investee, realizing a gross profit of $180,000 on the sale. At the end of the year, 30% of the inventory remained unsold by the investee.
a. Provide the equity method journal entries required for the year
Description | Debit | Credit |
---|---|---|
AnswerAdditional paid-in-capitalCashCommon stockEquity incomeEquity investment
| Answer
| Answer
|
AnswerAdditional paid-in-capitalCashCommon stockEquity incomeEquity investment
| Answer
| Answer
|
To record the recognition of equity income. | ||
AnswerAdditional paid-in-capitalCashCommon stockEquity incomeEquity investment
| Answer
| Answer
|
AnswerAdditional paid-in-capitalCashCommon stockEquity incomeEquity investment
| Answer
| Answer
|
To record deferred profits in ending inventory. | ||
AnswerAdditional paid-in-capitalCashCommon stockEquity incomeEquity investment
| Answer
| Answer
|
AnswerAdditional paid-in-capitalCashCommon stockEquity incomeEquity investment
| Answer
| Answer
|
To record receipt of dividends. |
b. What is the balance of the Equity Investment at the end of the year?
$Answer
c. Assume that the inventories are all sold in the following year, that the investee reports $675,000 of net income. How much equity income will the investor report for the following year?
$Answer
Step by Step Solution
There are 3 Steps involved in it
Step: 1
Get Instant Access with AI-Powered Solutions
See step-by-step solutions with expert insights and AI powered tools for academic success
Step: 2
Step: 3
Ace Your Homework with AI
Get the answers you need in no time with our AI-driven, step-by-step assistance
Get Started