Suppose that on January 6, 2018, Excel Motors paid $240,000,000 for its 45% investment in Dynamic Motors. Excel has significant influence over Dynamic after the purchase. Assume Dynamic earned net income of $10,000,000 and paid cash dividends of $15,000,000 to all outstanding stockholders during 2018. (Assume all outstanding stock is voting stock.) Read the requirements Requirement 1. What method should Excel Motors use to account for the investment in Dynamic Motors?2. Journalize all required 2018 transactions related to Excel Motors's Dynamic investment. Include an explanation for each entry.3. Post all 2018 transactions to the investment T account. What is its balance after all transactions are posted? How would be this balance be classified on the balance sheet dated December 31 2018?

1. What method should Excel Motors use to account for the investment in Dynamic Motors?

equity method since Excel Motors exercises significant influence (more than 20% of outstanding stocks) over Dynamic Motors

2. Journalize all required 2018 transactions related to Excel Motors's Dynamic investment. Include an explanation for each entry.

January 6, 2018, investment in Dynamic Motors

Dr Investment in Dynamic Motors 240,000,000

    Cr Cash 240,000,000

Sometime during 2018, cash dividends are distributed

Dr Cash 6,750,000

    Cr Investment in Dynamic Motors 6,750,000

Under equity method, cash dividends decrease investment account

December 31, 2018, net income is reported

Dr Investment in Dynamic Motors 4,500,000

    Cr Investment revenue 4,500,000

Under equity method, net income increases investment account

3. Post all 2018 transactions to the investment T account. What is its balance after all transactions are posted? How would be this balance be classified on the balance sheet dated December 31 2018?

Investment in Dynamic Motors

debit                    credit

240,000,000                                        (January 6, 2018)

                            6,750,000                (sometime during 2018)

4,500,000                                            (December 31, 2018)

$237,750,000 ⇒ Investment account should be reported as a non-current asset account.

Cash

debit                    credit

                            240,000,000           (January 6, 2018)

6,750,000                                             (sometime during 2018)

                            $233,250,000 ⇒ negative balance since we were not given the initial cash amount. Cash is a current asset account.

Investment revenue

debit                    credit

                            $4,500,000               (December 31, 2018)

*Revenues are not reported on the balance sheet, but they do increase retained earnings account.

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