Fill in the dollar changes caused in the Investment account and Dividend Income or Investment Revenue...
Fill in the dollar changes caused in the Investment account and Dividend Income or Investment Revenue account by each of the following transactions, assuming Crane Company uses (a) the fair value method or (b) the equity method for accounting for its investments in Hudson Company. (Must Show All Work and Formulas)
You should have amounts for BOTH methods for each of the 4 activities.
At the end of Year 3, compute the ending balance in the Investment account under the Fair Value and Equity methods. (MUST SHOW ALL WORK and Formulas)
1. At the beginning of Year 1, Crane bought 300,000 shares (30%) at $30 per share of Hudson's outstanding common stock.
2. During Year 1, Hudson reported $600,000 of net income and paid $300,000 of dividends. The common stock was trading at $31 per share at year-end.
3. During Year 2, Hudson reported $500,000 of net income and paid $250,000 of dividends. The common stock was trading at $32 per share at year-end.
4. During Year 3, Hudson reported a net loss of $30,000 and paid $100,000 of dividends. The common stock was trading at $ 25 per share at year-end.
Fair Value Method Equity Method
Investment Dividend Investment Investment
Account Income Account Revenue
Year 1
Year 2
Year 3
Homework Answers
(a) The fair value method:
| Date | Account Titles and Explanation | Debit | Credit |
| Year 1 | Equity Investment (300000 x $30) | 9000000 | |
| Cash | 9000000 | ||
| (To record purchase of investment) | |||
| Cash (30% x $300000) | 90000 | ||
| Dividend revenue | 90000 | ||
| (To record dividend received) | |||
| Fair value adjustment [300000 x ($31 - $30)] | 300000 | ||
| Unrealized holding gain or loss | 300000 | ||
| (To record investment at fair value) | |||
| Year 2 | Cash (30% x $250000) | 75000 | |
| Dividend revenue | 75000 | ||
| (To record dividend received) | |||
| Fair value adjustment [300000 x ($32 - $31)] | 300000 | ||
| Unrealized holding gain or loss | 300000 | ||
| (To record investment at fair value) | |||
| Year 3 | Cash (30% x $100000) | 30000 | |
| Dividend revenue | 30000 | ||
| (To record dividend received) | |||
| Unrealized holding gain or loss | 2100000 | ||
| Fair value adjustment [300000 x ($32 - $25)] | 2100000 | ||
| (To record investment at fair value) |
(b) The equity method:
| Date | Account Titles and Explanation | Debit | Credit |
| Year 1 | Equity Investment (300000 x $30) | 9000000 | |
| Cash | 9000000 | ||
| (To record purchase of investment) | |||
| Cash (30% x $300000) | 90000 | ||
| Equity Investment | 90000 | ||
| (To record dividend received) | |||
| Equity Investment (30% x $600000) | 180000 | ||
| Investment revenue | 180000 | ||
| (To record share in net income of investee) | |||
| Year 2 | Cash (30% x $250000) | 75000 | |
| Equity Investment | 75000 | ||
| (To record dividend received) | |||
| Equity Investment (30% x $500000) | 150000 | ||
| Investment revenue | 150000 | ||
| (To record share in net income of investee) | |||
| Year 3 | Cash (30% x $100000) | 30000 | |
| Equity Investment | 30000 | ||
| (To record dividend received) | |||
| Investment revenue | 9000 | ||
| Equity Investment (30% x $30000) | 9000 | ||
| (To record share in net income of investee) |
| Fair Value Method | Equity Method | |||
| Investment Account | Dividend Income | Investment Account | Investment Revenue | |
| Year 1 | 9300000 | 90000 | 9090000 | 180000 |
| Year 2 | 9600000 | 75000 | 9165000 | 150000 |
| Year 3 | 7500000 | 30000 | 9126000 | -9000 |
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