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On January 1, 2021, an investor company purchased a 20% interest in an investee company. The investor concluded that it could exert significant influence over
On January 1, 2021, an investor company purchased a 20% interest in an investee company. The investor concluded that it could exert significant influence over the investee and would account for that investment using the equity method. The book value of the investee's Stockholders' Equity (i.e., net assets) on the acquisition date was $500,000 and the investor purchased its 20% interest for $135,000 in cash. The investor was willing to pay the purchase price because the investee owned an unrecorded (internally developed) patent with a fair value equal to $80,000 and a remaining useful life of 10 years. Any other excess value associated with this acquisition was attributed to goodwill. Subsequent to the acquisition, during 2021, the investee reported net income of $100,000 and other comprehensive income of $28,000 and paid a cash dividend totaling $20,000. During the year, the investor sold inventories to the investee with an original cost $50,000 and a sale (transfer) price of $80,000. At the end of the year, 40% of these inventories remained on the investee's balance sheet. Finally, at the end of the year, the investor sold the investment in the investee for $170,000. Required: (Be sure to provide supporting calculations to obtain credit) 1. (25 points) Prepare all of the investor's journal entries for 2021 in relation to the investee. 2. (3 points) Determine the total amount of Equity Income from the investee in 2021
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