Question

1. Equity Method (30 points) May Company acquires a 40% interest in Barrett Corporation and concludes that it has significant influence over Barrett. The book value of Barrett's stockholders' equity is $800,000 and May pays $450,000 for the investment. An excess of purchase price over book value was attributable to an unrecorded customer list worth $325,000, with a useful life of 10 years. After the acquisition, Barrett reported net income of $300,000 and paid May a dividend of $20,000. At the end of the year, May sells the investment for $550,000. Prepare all entries related to the investment during the year.

Answer 1

Solution:

Sl No.	Account title and explanation	Debit	Credit
1	Equity Investment	$        450,000
	Cash		$        450,000
	[Being equity investment made]
2	Equity Investment ($ 300000*40/100 )	$        120,000
	Equity Income		$        120,000
	[To record revenue]
3	Cash	$          20,000
	Equity Investment		$          20,000
	[To record dividends]
4	Equity Income ( $130,000 / 10 years)	$ 13,000
	Equity Investment		$ 13,000
	[ Being excess purchase price amortized for 10 years]
5	Cash	$        550,000
	Equity Investment ( $ 450,000 + $ 120,000-$20,000-$13,000)		$        537,000
	Gain on sale of investment		$ 13,000
	[ Being investments sold ]

Notes:

1) Excess Purchase Price = Purchase Price - Book Value of Investment = $ 450,000 - $ 320,000( $800,000 * 40%)

= $ 130,000