Question

Recording Entries for Equity Investment: Equity Method On January 1, 2020, Mercedez Company purchased 360 of the 900 outstanding shares of Auto Supplies Inc. for $36,000. At that date, the balance sheet of Auto Supplies Inc. showed the following values. Assets not subject to depreciation Assets subject to depreciation Liabilities Common stock (par $1) Retained earnings $36.000 * 23,400 ** 5,400 * 45,000 9,000 * Same as fair value. ** Fair value $27,000; the assets have a 10-year remaining useful life (straight-line depreciation). a. Provide the entry by Mercedez Company to record the acquisition at a cost of $36,000. Date Account Name Dr. Jan. 1, 2020 b. Assume that on December 31, 2020 (end of the accounting period), Auto Supplies Inc reported net income of $10,800. Provide all year-end entries for Mercedez Company. Date Account Name Cr. Dec. 31, 2020 Dr. To record proportionate share of investees net income Dec 31, 2020 To adjust for depreciation c. In February 2021, Auto Supplies Inc. declared and paid a $2 per share cash dividend. Provide the necessary entry for Mercedez Company. Date Account Name Feb. 2021 Cr. Check

Answer 1

	Date	Account name	Dr.	Cr.
a	Jan 1, 2020.	Investment in Auto supplies common stock	$ 36,000
		Cash		$ 36,000
b	Dec 31, 2020.	Investment in Auto supplies common stock	$    4,320
		Equity in auto supplies earnings		$    4,320
		To record proportionate share of net income
	Dec 31, 2020.	Equity in auto supplies earnings	$       144
		Investment in Auto supplies common stock		$       144
		To adjust for depreciation
c	Feb 2021.	Cash	$       720
		Investment in Auto supplies common stock		$       720

Shareholding percentage = 360/900 = 40%

Share in net income = $10,800 X 40% = $4,320

Depreciation share = ($27,000 - $23,400)/ 10 years X 40% = $144

Dividends = 360 shares X $2 per share = $720