Matrix Inc. acquired 25% of Neo Enterprises for $2,000,000 on January 1,2011 The

Question

Matrix Inc. acquired 25% of Neo Enterprises for $2,000,000 on January 1,2011 The fair value and book value of 25% of Neo's identifiable net assets was $2,000,000 and $1,600,000 on that date, and the difference was attributable to assets that would be depreciated over 10 years. During 2011 Neo recognized net income of $500,000 and paid dividends of $400,000.Neo had a total fair value of $10,000,000 as of Dec. 31 2011 Required: Prepare the journal entries necessary in 2011 to account for the Neo investment, assuming that Fredo accounts for that investment as an equity method investment. 1)Purchase 2)Net income adjustment 3)Dividend adjustment

Explanation / Answer

Journal Entries: Investment in Neo Dr. 2000000 To Cash Cr. 2000000 Investment Income Dr. (25%*500000) 125000 Investment in Neo Cr. 125000 Cash Dr. (25%*400000) Dr. 100000 To Investment in Neo Cr. 100000

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