Accounting for the Equity Investment When Price Exceeds Book ValueAssume an investor purchases all of the stock of the investee in a stock purchase for $1,800. The investee's balance sheet on the date of purchase is as follows:Accounts receivable $150 Mortgage payable$150Inventories300Building1200 Stockholders' equity1500Total assets$1,650 Total liabilities and equity $1,650In this example, the amount paid (i.e., $1,800) is $300 greater than the book value of the net assets of the investee (i.e., $1,500). Assume the additional $300 of purchase price relates to an unrecognized patent held by the investee that has a remaining useful life of 10 years on the acquisition date. We also assume, subsequent to the purchainvestee reports net income of $300 and pays $90 in dividends to the investor.Requireda. Provide the journal entry to recognize the Equity Income by the investor.b. Provide the journal entry to record the receipt of the dividend.c. Provide the journal entry to record the amortization of the patent asset.a.b.C.(to record equity income.)(to record the receipt of dividends.)(to record the amortization of the patent.)DebitCredit

Answered: Accounting for the Equity Investment…

FINANCIAL ACCOUNTING

10th Edition

ISBN:9781259964947

Author:Libby

Publisher:Libby

Chapter1: Financial Statements And Business Decisions

Section: Chapter Questions

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Accounting for the Equity Investment When Price Exceeds Book Value
Assume an investor purchases all of the stock of the investee in a stock purchase for $1,800. The investee's balance sheet on the date of purchase is as follows:
Accounts receivable $150 Mortgage payable
$150
Inventories
300
Building
1200 Stockholders' equity
1500
Total assets
$1,650 Total liabilities and equity $1,650
In this example, the amount paid (i.e., $1,800) is $300 greater than the book value of the net assets of the investee (i.e., $1,500). Assume the additional $300 of purchase price relates to an unrecognized patent held by the investee that has a remaining useful life of 10 years on the acquisition date. We also assume, subsequent to the purcha
investee reports net income of $300 and pays $90 in dividends to the investor.
Required
a. Provide the journal entry to recognize the Equity Income by the investor.
b. Provide the journal entry to record the receipt of the dividend.
c. Provide the journal entry to record the amortization of the patent asset.
a.
b.
C.
(to record equity income.)
(to record the receipt of dividends.)
(to record the amortization of the patent.)
Debit
Credit

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Step 1: Introduction

Using the journalizing technique in accounting, all business transactions are recorded in the financial records. The original record of a business transaction is kept in a journal, commonly referred to as a book of original entries. Every business transaction is entered into the journal and is kept in chronological order as it happens.

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