Question

Red purchased 10% of blue on January 1, 2019 for $320,000 in cash and did not have the ability to exercise significant influence. During 2019 blue paid $125,000 in dividends and reported income of $600,000. On December 31, 2019 the market value of red investment in blue climbed to $375,000.

a. journalize all necessary entries on the book of read assuming available for sale securities using the fair value method in 2019.

b. Assume instead that red purchase 25% of the shares on January 1, 2019 for $700,000 which is $50,000 greater than 25% of blues book value the excess is to be amortized over 10 years. Record the activity for 2019 using the equity method.

Answer 1

a.)	Date	Account Titles	Debit $	Credit $
	January 1,2019	Investment in Blue- AFS	320,000
		Cash		320,000
	2019	Cash	12,500
		Dividend Revenue		12,500
		(125,000 x 10% )
	December 31,2019	Fair Value Adjustment	55,000
		Unrealized holding gain - Other Comprehensive Income		55,000
		(375,000 - 320,000 )
b.)	Date	Account Titles	Debit $	Credit $
	January 1,2019	Investment in Blue- Equity Method	700,000
		Cash		700,000
	2019	Cash	31,250
		Investment in Blue- Equity Method		31,250
		(125,000 x 25% )
	December 31,2019	Investment in Blue- Equity Method	150,000
		Investment Revenue		150,000
		(600,000 x 25% )
	December 31,2019	Investment Revenue	1,250
		Investment in Blue- Equity Method		1,250
		(50,000/10 ) x 25%