On January 1, 2017, Joey Co. acquired 300,000 shares, which represents 30% of Legoria CO.s voting shares, by paying $40 per share for a total of $12,000,000 Cash. Joey Co. has significant influence over Legoria Co., and therefore the Equity Method of accounting is appropriate GAAP. On the date acquisition, Legoria Co.s net book value is $30 Million. An analysis of Legorias assets and liabilities indicates that plant and equipment (10 year life) is reported at $1 million less than fair value and that Legoria has unreported technology (5 year life) valued at $5 million. Legoria Co. reports net income of $2 Million for the year ended 12/31/2017. It declares a dividend of $0.50 per share on 11/1/2017 and pays the dividend on 12/1/2017.

In addition, during 2017 Legoria Co. sells inventory to Joey Co. (upstream) at an average markup of 20 percent on cost. Joey Co. still holds $210,000 of this inventory at year-end 2017. Also, during 2017, Joey Co sells inventory to Legoria Co. (downstream) at an average markup of 25 percent on cost. Legoria Co. holds $100,000 of this inventory at year-end.

Required:

1.) Give the Journal Entries on Joey Cos Books for 2017 related to its Investment in Legoria Co. using the Equity Method.

2.) Briefly describe why the equity method of accounting is criticized for being an accounting method that allows off balance sheet financing.