Question

assume prince corporation purchased 100 percent ownership of snow company on January 1, 2015, for $226,000 and paid cash. on that date, the book value of items reported net assets was $200,000. the excess over book value paid is attributable to depreciable assets with a remaining useful life of 10 years. net income and dividend payments of snow were 10,000 and 5,000 in 2015, and were 20,000 and 22,000 in 2016. (SHOW WORK)

Required:

1. prepare the journal entries that would be recorded by prince in 2016 using the equity method.

2. Determine the balance in the investment in snow account on December 31, 2016, under the equity method.

Answer 1

Please find below anwer:

Equity Method ; Under eutiy method : The investing entity record the intial cost of the investment in the balance sheet investment account. The euity method seeks to reflect subsequent chnages in value of investee business in this investment account ( such as income,dividdend) etc.

Journal Entry				Balance in book of Snow company
Year	Particulars	Debit ($)	Credit ($)		Partcilaurs	Amount
Jan-15					Intial Investment	$                                       226,000
1a)	Investment in Snow Company	$        226,000			Add: Share of Income
	Cash		$        226,000		Year 2015	$                                    10,000.00
	( To record the purchase of Snow Company)				Year 2016	$                                    20,000.00
					Less : Dividend Received
1b)	Cash A/C Dr.	$            5,000			Year 2015	$                                      5,000.00
	Investment in Snow Company		$            5,000		Year 2016	$                                    22,000.00
	(To record dividend from Snow Company)				Less : Patent amortisation
					2600*2	$                                      5,200.00
1c)	Investment in Snow Company	$          10,000			Balance as on Dec 2016	$                                 223,800.00
	Income from Snow Company
	(To record Equity Method Income from Snow Company)		$          10,000
1d)	Income from Snow Company	$            2,600
	Investment in Snow Company		$            2,600
	(To record amortization of differential value)
	(226000-200000)/10 = $ 2600
Jan-16
1a)	Cash A/C Dr.	$          22,000
	Investment in Snow Company		$          22,000
	(To record dividend from Snow Company)
1b)	Investment in Snow Company	$          20,000
	Income from Snow Company
	(To record Equity Method Income from Snow Company)		$          20,000
1c)	Income from Snow Company	$            2,600
	Investment in Snow Company		$            2,600
	(To record amortization of differential value)
	(226000-200000)/10 = $ 2600