Business, 01.09.2020 20:01 legacieenglish

Equity method journal entries (price greater than book value) An investor purchases a 25% interest in an investee company, and the investor concludes that it can exert significant influence over the investee. The book value of the investee’s Stockholders’ Equity on the acquisition date is $500,000, and the investor purchases its 25% interest for $145,000. The investor is willing to pay the purchase price because the investee owns an unrecorded (internally developed) patent that the investor estimates is worth $80,000. The patent has a remaining useful life of 10 years. Subsequent to the acquisition, the investee reports net income of $100,000, and pays a cash dividend to the investor of $20,000. At the end of the first year, the investor sells the Equity Investment for $180,000. Prepare all of the required journal entries to account for this Equity Investment during the year.

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Answer from: avahrider1

See answer an explanation below.

Explanation:

The journal entries will look as follows:

General Journal

Description Debit ($) Credit ($)

Equity investment 145,000

Cash 145,000

(To record purchase of investment.)

Cash 25,000

Income from equity investment (w.1) 25,000

(To record equity income.)

Cash 20,000

Equity investment 20,000

(To record receipt of cash dividend.)

Income from equity investment 2,000

Equity investment (w.2) 2,000

(To record patent amortization expense.)

Cash 180,000

Gain on sale of equity invest. (w.4) 32,000

Equity investment (w.3) 148,000

(To record sale of investment.)

Workings

w.1: Income from equity investment = Investee's net income * Percentage of interest = $100,000 * 25% = $25,000

w.2: Equity investment = (Patent value / Remaining useful life) * Percentage of interest = ($80,000 / 10) * 25% = $8,000 * 25% = $2,000

w.3: Equity investment = $145,000 + $25,000 - $20,000 - $2,000 = $148,000

w.4: Gain on sale of equity investment = Sales proceed - w.3 = $180,000 - $148,000 = $32,000

Answer from: Quest

explanation: i am going to tell you a lie dont know i just wanted to answer lol

Answer from: Quest

Destablishing a distribution network

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