Question

As a long-term investment at the beginning of the fiscal year, Joey Co. purchased 30% of Legoria Supplies, Inc.’s, (a total of 8 million shares) for $56 Million. The fair value and book value of the shares were the same at that time. During the year, Legoria Supplies Inc. earned net income of $50 million and distributed cash dividends of $1.25 per share. At the end of the fiscal year, the fair value of the shares acquired by Joey Co. is $64 million. Joey Co’s 30% investment in Legoria Supplies Inc gives it significant influence. Required:

1) Prepare appropriate the appropriate journal entry(s) throughout the fiscal year for this investment using the Equity Method.

2) Prepare the journal entry(s) throughout the fiscal year if Joey Co. does not have significant influence (i.e. can’t use Equity Method).

Answer 1

1	Equity Method
	Account	Debit $	Credit $
a	Investment in Legorian Supplies.Inc	$      5,60,00,000		Fair value and book value same
	Cash/Bank		$      5,60,00,000
	(to record investment)
b	Investment in Legorian Supplies.Inc	$      1,50,00,000		(50 m*30%)
	Revenue from investment		$      1,50,00,000
	(to record income from investment)
c	Cash/bank	$      1,00,00,000		(8 million shares*$1.25 per share)
	Investment in Legorian Supplies.Inc		$      1,00,00,000
	(to record dividend from investment)
2	Joey Co. does not have significant influence( Fair Value method)
	Account	Debit $	Credit $
a	Investment in Legorian Supplies.Inc	$      5,60,00,000		Fair value and book value same
	Cash/Bank		$      5,60,00,000
	(to record investment)
b	Cash/bank	$      1,00,00,000		(8 million shares*$1.25 per share)
	Investment in Legorian Supplies.Inc		$      1,00,00,000
	(to record dividend from investment)
c	Unrealised Holding Gain or loss	$         80,00,000		As fair value more than purchase value
	Securities Fair Value Adjustment		$         80,00,000
	(64-56)
	(to record change in fair value)