On January 1, 2016, Field Company acquired 40% of North Company by purchasing 8,
ID: 2331414 • Letter: O
Question
On January 1, 2016, Field Company acquired 40% of North Company by purchasing 8,000 shares for $144,000 and obtained significant influence. On the date of acquisition, Field calculated that its share of the excess of the fair value over the book value of North’s depreciable assets was $15,000 and that the purchased goodwill was $12,000. At the end of 2016, North reported net income of $45,000 and paid dividends of $0.70 per share. Field depreciates its depreciable assets over a 12-year remaining life.
Required:
Jan 1 Investment in Stock 144,000
Cash 144,000
Dec 31 Cash 5,600
Investment in stock 5,600
Dec 31 Investment in stock 18,000
Investment income 18,000
Dec 31 Investment income ???
Investment in stock ??? (NOT $500 as answered in a previous post-that is incorrect!!)
Explanation / Answer
SOLUTION:
1)
Debit
Credit
Jan-01
Investment in Stock: North Company
144,000
Cash
144,000
Dec-31
Cash
5,600
Investment in Stock: North Company
5,600
Dec-31
Investment in Stock: North Company
18,000
Investment Income ($45,000 * 0.40)
18,000
Dec-31
Investment Income ($15,000/12)
1,250
Investment in Stock: North Company
1,250
2) Under equity method, the accounting for an investment tracks the investee "equity". That is, when the investee invests money (and experiences a corresponding rise in equity), the investor can record its share of that profit /loss. Thus is conceptual justified due to the accrual basis of accounting
Debit
Credit
Jan-01
Investment in Stock: North Company
144,000
Cash
144,000
Dec-31
Cash
5,600
Investment in Stock: North Company
5,600
Dec-31
Investment in Stock: North Company
18,000
Investment Income ($45,000 * 0.40)
18,000
Dec-31
Investment Income ($15,000/12)
1,250
Investment in Stock: North Company
1,250