Question

E28. Prepare journal entries for the transactions below relating to an Equity Investment accounted for using The equity method.

a. An investor purchases 14,400 common shares of an investee at $9 per share; the shares represent

25% ownership in the investee and the investor concludes that it can exert significant influence

Over the investee.

b. The investee reports net income of $96,000.

c. The investor receives a cash dividend of $1.50 per common share from the investee.

d. The investor sells all 14,400 common shares of the investee for $144,600.

E29. Assume that an investor owns 35% of an investee, and accounts for its investment using the equity method. At the beginning of the year, the Equity Investment was reported on the investor’s balance sheet at $360,000. During the year, the investee reported net income of $110,000 and paid dividends of $20,000 to the investor. In addition, the investor sold inventory to the investee, realizing a gross profit of $36,000 on the sale. At the end of the year, 15% of the inventory remained unsold by the investee.

a. How much equity income should the investor report for the year?

b. What is the balance of the Equity Investment at the end of the year?

c. Assume that the inventories are all sold in the following year, that the investee reports $160,000 of net income. How much equity income will the investor report for the following year?

E30. Despite a 50% ownership interest, Lions Gate Entertainment Corp. (Lionsgate) accounts for its invest-ment in TVGN, formerly known as the TV Guide Network, using te equity method of accounting. The company reports the following in its 2014 10-K:

TVGN. The Company’s investment interest in TVGN consists of an equity investment in its common stock units and mandatorily redeemable preferred stock units. The Company has determined it is not the primary beneficiary of TVGN because pursuant to the amended and restated operating agreement of the entity, the power to direct the activities that most significantly impact the economic performance of TVGN is shared with the other 50% owner of TVGN. Accordingly, the Company’s interest in TVGN is being accounted for under the equity method of accounting. During the year ended March 31, 2014, the Company contributed $6.5 million to TVGN. Additionally, the Company contributed $4.5 million to TVGN in April 2014.

Transactions with TVGN:

Lionsgate eliminates gross profit recognized by the Company on licensing sales to TVGN in proportion to the Company’s ownership interest in TVGN. There were no revenues or gross profits for licensed product to TVGN recognized by Lionsgate for the year ended March 31, 2014. The table below sets forth the revenues and gross profits recognized by the Company and the calculation of the profit eliminated for the years ended March 31, 2013 and 2012:

Year Ended March 31,

(amounts in thousands)                                  2013                           2012

Revenue recognized on sales to TVGN ........................ $2,925                      $2,925

Gross profit on sales to TVGN ............................... 687                      969

Ownership interest in TVGN................................. 50%                      51%

a. What amount of intercompany profits from TVGN does Lionsgate defer or eliminate for the year ended March 31, 2013?

b. How does the deferral or elimination of TVGN intercompany profits impact Lionsgate’s equity income and investment accounts?

Answer 1

E28

Journal

Date	Account title	Debits	Credits
a	Stock investments	129,600
	Cash		129,600
b	Stock investments (96,000 x 25%)	24,000
	Revenue from investment in Investee Company		24,000
c	Cash	21,600
	Stock investments (14,400 x 1.5))		21,600
d	Cash	144,600
	Stock investments		132,000
	Gain on sale of stock investments		12,600

Gain on sale of stock investments = Sales price of investments - Balance in stock investments

= 144,600 - (129,600 + 24,000 - 21,600)

= 144,600 - 132,000

= $12,600

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