Question

this question is about : Adjusting investment account and determine income when additional investments qualifies for equity method of accounting

Summary balance sheet and income information for Son Company for two years is as follows (in thousands):

	Jan 1, 2016	Dec 31, 2016	Dec 31, 2017
Current assets	50	60	75
Plant assets	200	240	250
Total	250	300	325
Liabilities	40	50	50
Capital stock	150	150	150
Retained earnings	60	100	125
Total	250	300	325

Net income for 2016: 100

Dividends for 2016: 60

Net income for 2017: 50

Dividends for 2017: 25

On Jan 2, 2016, Pop Co. purchases 10 percent of Son Co. for $25,000 cash, and it accounts for its investment (classified as available for sale security) in Son using the fair value method. On Dec 31, 2016 the fair value of all of Son's stock is $500,000. On Jan 2, 2017, Pop purchases an additional 10 percent interest in Son stock for $50,000 and adopts the equity method to account for the investment. The fair value of Son's assets and liabilities were equal to the book values at the time of both stock purchases.

1.) Prepare the journal entry to adjust the Investment in Son account to the equity method on Jan 2, 2017 and determine Pop's income from Son in 2017

Answer 1

1)
Goodwill From Ist 10% Investment
Cost of Investment	25000
Less: Book Value of acquired (Jan 2016) = 10% x (150,000 + 60,000)	21000
Excess Fair Value over Book Value	4000
Goodwill From 2nd 10% Investment
Cost of Investment	50000
Less: Book Value of acquired (Jan 2017) = 10% x (150,000 + 100,000)	25000
Excess Fair Value over Book Value	25000
Journal Entry
Accumulated Gain/Loss on stock available for sale	25000
Valaution Allowance to record Son at Fair Value		25000
Investment in Son	4000
Retained Earnings		4000
Share of Son's Income for 2016 (10% x 100,000)	10000
Less: Share of Dividend for 2016 (10% x 60,000)	6000
Retained Earnings	4000
2)
Income from Son on original 10% investment = $50000 x 10%)	5000
Income from Son on Second 10% investment = $50000 x 10%	5000
Pop's Income from Son	10000