Matrix, Inc. acquired 20% of Neo Enterprises for $500,000 on January 1, 2015. The fair value and book value of 20% of Neo's identifiable net assets was $500,000 and $480,000 on that date, and the difference was attributable to assets that would be depreciated over 10 years. During 2015 Neo recognized net income of $200,000 and paid dividends of $100,000. Neo had a total fair value of $528,000 as of December 31, 2015. Required: Prepare the journal entries necessary to account for the Neo investment, assuming that Matrix accounts for that investment as (1) an equity method investment, and (2) elects the fair-value option. Show entries for the purchase of the investment, recognition of net income, receipt of dividends, and adjustment at year-end, as appropriate. Indicate whether gains or losses (realized, unrealized) are reported on the income statement or other comprehensive income. Date Accounts Debit Credit Equity Method Investment in Neo 500,000 Cash 500,000 Cash Investment in Neo Investment in Neo Investment income (revenue) Investment income Investment in Neo Fair Value Method Investment in Neo 500,000 Cash 500,000 Cash Investment income Fair Value adjustment Net unrealized holding gains—

SWFT Corp Partner Estates Trusts

42nd Edition

ISBN:9780357161548

Author:Raabe

Publisher:Raabe

Chapter7: Corporations: Reorganizations

Section: Chapter Questions

Problem 42P

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Matrix, Inc. acquired 20% of Neo Enterprises for $500,000 on January 1, 2015. The fair value and book value of 20% of Neo's identifiable net assets was $500,000 and $480,000 on that date, and the difference was attributable to assets that would be depreciated over 10 years.

During 2015 Neo recognized net income of $200,000 and paid dividends of $100,000. Neo had a total fair value of $528,000 as of December 31, 2015.

Required: Prepare the journal entries necessary to account for the Neo investment, assuming that Matrix accounts for that investment as (1) an equity method investment, and (2) elects the fair-value option. Show entries for the purchase of the investment, recognition of net income, receipt of dividends, and adjustment at year-end, as appropriate. Indicate whether gains or losses (realized, unrealized) are reported on the income statement or other comprehensive income.

Date	Accounts	Debit	Credit
	Equity Method
	Investment in Neo	500,000
	Cash		500,000

	Cash
	Investment in Neo

	Investment in Neo
	Investment income (revenue)

	Investment income
	Investment in Neo


	Fair Value Method
	Investment in Neo	500,000
	Cash		500,000

	Cash
	Investment income

	Fair Value adjustment
	Net unrealized holding gains—

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