Damon, Inc., acquired 25% of Jolie Enterprises for $8,000,000 on October 1, 2021. The total fair...
Damon, Inc., acquired 25% of Jolie Enterprises for $8,000,000 on
October 1, 2021. The total fair value of Jolie’s identifiable net
assets was $27,000,000 on that date, and the total book value of
those net assets was $23,000,000. The difference between fair value
and book value is attributed to equipment that has a remaining
useful life of four years. During 2021 Jolie recognized net income
of $2,000,000 and paid dividends of $1,200,000 ($300,000 per
quarter). Jolie had a fair value of $36,000,000 as of December 31,
2021.
Required:
Assume Damon accounts for the Jolie investment under the equity
method. Indicate the total effect of the Jolie investment on
Damon’s:
1. net income for 2021.
2. the balance in Damon's investment in equity
affiliate account on December 31, 2021.
Homework Answers
| Answer 1 | Effect on net income | Income from equity investment (500000-62500) | 437,500 |
| Answer 2 |
Effect on balance in Damon's investment |
Damon's investment in equity affiliate account on December 31, 2021 (8000000-75000+500000-62500) | 8,362,500 |
Explain
| Allocated to equipment (27000000-23000000) | 4,000,000 | ||
| Annual depreciation (4000000/4) | 1,000,000 | ||
| Date | Accounts title | Debit | Credit |
| October 1, 2021 | Investment in Jolie Enterprises [equity affiliate] | 8,000,000 | |
| Cash | 8,000,000 | ||
| (To record Purchase of Investment.) | |||
| December 31, 2021 | Cash | 75,000 | |
| Investment in Jolie Enterprises [equity affiliate] | 75,000 | ||
| (To record Dividend Received.) (300000*25%) | |||
| December 31, 2021 | Investment in Jolie Enterprises [equity affiliate] | 500,000 | |
| Income from equity investment | 500,000 | ||
| (To record Income from Equity Investment.) (2000000*25%) | |||
| December 31, 2021 | Income from equity investment | 62,500 | |
| Investment in Jolie Enterprises [equity affiliate] | 62,500 | ||
| (To record depreciation of equipment.) [Oct to Dec =3 months) ((1000000*3/12)*25%) |
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