Question

Saxton Corporation purchased 30 percent of Taylor Company’s voting stock on January 1, 2016, for $4 million in cash. At the date of acquisition, Taylor reported its total assets at $80 million and its total liabilities at $74 million. Investigation revealed that Taylor’s plant and equipment (10-year life) was overvalued by $2 million and it had an unreported customer database (3-year life) valued at $700,000. Taylor declares and pays $150,000 in dividends and reports net income of $325,000 in 2019.

Required
Prepare the necessary journal entries on Saxton’s books to report the above information for 2019 assuming Saxton uses the equity method to report its investment.

General Journal
	Description	Debit	Credit
	AnswerCashInvestment in TaylorEquity in net income of Taylor	Answer	Answer
	AnswerCashInvestment in TaylorEquity in net income of Taylor	Answer	Answer
	To record receipts of dividends.
	AnswerCashInvestment in TaylorEquity in net income of Taylor	Answer	Answer
	AnswerCashInvestment in TaylorEquity in net income of Taylor	Answer	Answer
	To record earnings of the investee.

Answer 1

Preparing journal entries in the books of Saxton Corporation uses equity method to report its investment:

Date	Account Title and Explanation	Debit	Credit
Dec-16	Equity investment in Taylor	97,500
	Taylor's net income ($325,000*30%)		97,500
	(To record net income of Taylor 30% booked in investment account)
Dec-16	Cash ($150,000*30%)	45,000
	Equity investment in Taylor		45,000
	(TO record dividend received adjusted to investment account)
Dec-16	Depreciation-plant and Equipment ($2,000,000/10)	200,000
	Equity investment in Taylor		200,000
	(to record overvalued plant and equipment adjusted to investment account)