Question

Pistol Corporation purchased 100 percent ownership of Scope Products on January 1, 20X6, for $60,000, at which time Scope Products reported retained earnings of $13,000 and capital stock outstanding of $26,000. The differential was attributable to patents with a life of four years. Income and dividends of Scope Products were

Year	Net Income			Dividends
20X6	$	17,000		$	7,000
20X7		25,000			9,000
20X8		33,000			9,000

Required:
1. Prepare the equity method entries that Pistol should record to account for this investment in 20X6, 20X7, and 20X8. (If no entry is required for a transaction/event, select "No journal entry required" in the first account field.)
  2. What is the balance of the Investment in Scope account on Pistol's balance sheet at December 31, 20X8, after all required equity method entries have been recorded?
  

Answer 1

Below is the solution, please comment if any explanation needed

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1. Equity Method Journal Entries for Pistol Corporation.
Under the Equity Method, The investing entity records the initial cost of the investment in the balance sheet investment account. The equity method seeks to reflect any subsequent changes in the value of the investee business in this investment account (such as Income, Dividend, etc).
Year	Particulars	Debit($)	Credit($)
20X6
1a	Investment in Scope Products	$60,000
	Cash		$60,000
1b	Cash	$7,000
	Investment in Scope Products		$7,000
1c	Investment in Scope Products	$17,000
	Income from Scope Products		$17,000
1d	Income from Scope Products	$5,250
	Investment in Scope Products		$5,250
	{ ($60000-$13000-$26000) / 4 years }
20X7
2a	Cash	$9,000
	Investment in Scope Products		$9,000
2b	Investment in Scope Products	$25,000
	Income from Scope Products		$25,000
2c	Income from Scope Products	$5,250
	Investment in Scope Products		$5,250
	{ ($60000-$13000-$26000) / 4 years }
20X8
3a	Cash	$9,000
	Investment in Scope Products		$9,000
3b	Investment in Scope Products	$33,000
	Income from Scope Products		$33,000
3c	Income from Scope Products	$5,250
	Investment in Scope Products		$5,250
	{ ($60000-$13000-$26000) / 4 years }
2. Calculation of Balance in Investment in Scope Products.
Particulars	Amount ($)
Initial Investment Amount	$60,000
Add : Share of Income
20X6 = 17000
20X7 = 25000
20X8 = 33000	$75,000
Less : Dividend Received
20X6 = 7000
20X7 = 9000
20X8 = 9000	-$25,000
Less : Patent Amortization
$ 5,250 * 3 years	-$15,750
Balance in Investment in Scope Products Account as on Dec. 31 20X8	$94,250