Question

Accounting for Equity Method Investments Easton Company acquires 40 percent of the outstanding voting shares of Harris Company on January 1, 2019. To obtain these shares, Easton pays $156,000 in cash. Harris's book value of stockholders' equity is $280,000. Easton believes that (1) Harris buildings are undervalued by $40,000, and (2) Harris has an unrecorded patent that Easton values at $30,000. Easton considers the remaining balance sheet items to be fairly valued (no book-to-fair value difference). The remaining $40,000 of the purchase price excess over book value is ascribed to corporate synergies and other general unidentifiable intangible assets (goodwill). Assume that the undervalued buildings have an estimated remaining useful life of 20 years and the unrecorded patent has a useful life of 5 years. During 2019, Harris reported net income of $80,000 and paid cash dividends to shareholders totaling $40,000. a. Using the financial statement effects template, record Easton Company's equity in the earnings of Harris Company, including any amortization of the excess of fair value over book value of assets acquired. Balance Sheet Income Statement Noncash Asset Contrib. Capital Transaction Cash Asset + Liabilities + + Earned Capital 156,000 x Revenues Expenses = Net Income To record equity in earnings 0 + 96,000 x = 0 + + 32,000 x 0 32,000 x b. What is the value of the investment in Harris Company reported on Easton Company's balance sheet as of December 31, 2019? $ 172,000 X

Answer 1

% Acquired	40%
Amount Paid	$156,000
BooK Value of the Equity	$280,000
Breakup of Amount paid
For Book value of equity	$280,000
For Undervalued building Over and Above its Book value	$40,000
ForPatent	$30,000
For others	$40,000
Total	$390,000
Hence $390000*40%	$156,000
Building Fair value over the book value	$40,000
Useful life(Years)	20
Excess Depreciation per year	$2,000
Share of Easton Company(40%)	$800
Patents at fair value	$30,000
Usefil Life(Years)	5
Amortisation Per year	$6,000
Share of Easton Company(40%)	$2,400

A.

Journal entry
date	accounts	Debit	Credit
01-01-2019	Investment in Harris Co	$156,000
	Cash		$156,000
	(To record purchases)
31-12-2019	Cash	$16,000
	Investment in Harris Co		$16,000
	(To record Dividend receipt)
31-12-2019	Investment in Harris Co	$32,000
	Investment income		$32,000
	(To record Share in net Income)
31-12-2019	Investment income	$800
	Investment in Harris Co		$800
	(To record excess depreciation adjustment)
31-12-2019	Investment income	$2,400
	Investment in Harris Co		$2,400
	(To record excess amortization adjustment)
Total Investment Income($32000-$800-$2400)	$28,800	(Revenue in income statement)
Earned capital	$28,800

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b

Value Of Investment on Dec,31,2019
Opening Value	$156,000
Less-Dividend receipt	-$16,000
Add-Share in income	$32,000
Less-Depreciation adjustment	-$800
Less-Amortisation Adjustment	-$2,400
Total	$168,800