On January 1, 2019, Field Company acquired 40% of North Company by purchasing 10,000 shares for $180,000 and obtained significant influence. On the date of acquisition, Field calculated that its share of the excess of the fair value over the book value of North’s depreciable assets was $15,000 and that the purchased goodwill was $12,000. At the end of 2019, North reported net income of $45,000 and paid dividends of $0.60 per share. Field depreciates its depreciable assets over a 12-year remaining life. Required: 1. Prepare all the journal entries of Field to record the preceding information for 2019. 2. Next Level What is the conceptual justification for the use of the equity method? {Chart of Accounts} {General Journal} The conceptual justification for the use of the equity method is: a. It recognizes that fair value is not an appropriate valuation method for the investment because the investor could influence the amount of income it recognizes. b. It recognizes that a material relationship exists between the investor and the investee. c. It closely fits the requirements of accrual accounting by reporting the investor's share in investee income in the period in which it is earned rather than as cash is received. d. All of the choices are correct.

FINANCIAL ACCOUNTING

10th Edition

ISBN:9781259964947

Author:Libby

Publisher:Libby

Chapter1: Financial Statements And Business Decisions

Section: Chapter Questions

Problem 1Q

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On January 1, 2019, Field Company acquired 40% of North Company by purchasing 10,000 shares for $180,000 and obtained significant influence. On the date of acquisition, Field calculated that its share of the excess of the fair value over the book value of North’s depreciable assets was $15,000 and that the purchased goodwill was $12,000. At the end of 2019, North reported net income of $45,000 and paid dividends of $0.60 per share. Field depreciates its depreciable assets over a 12-year remaining life.

Required:

1.	Prepare all the journal entries of Field to record the preceding information for 2019.
2.	Next Level What is the conceptual justification for the use of the equity method?

{Chart of Accounts}

{General Journal}

The conceptual justification for the use of the equity method is:

a. It recognizes that fair value is not an appropriate valuation method for the investment because the investor could influence the amount of income it recognizes.

b. It recognizes that a material relationship exists between the investor and the investee.

c. It closely fits the requirements of accrual accounting by reporting the investor's share in investee income in the period in which it is earned rather than as cash is received.

d. All of the choices are correct.

CHART OF ACCOUNTS
Field Company
General Ledger
ASSETS
REVENUE
111 Cash
411 Sales Revenue
121 Accounts Receivable
423 Investment Income
141 Inventory
431 Interest Income
152 Prepaid Insurance
181 Equipment
EXPENSES
189 Accumulated Depreciation
500 Cost of Goods Sold
192 Investment in Stock: North Company
511 Insurance Expense
512 Utilities Expense
LIABILITIES
521 Salaries Expense
211 Accounts Payable
532 Bad Debt Expense
231 Salaries Payable
540 Interest Expense
250 Unearned Revenue
541 Depreciation Expense
261 Income Taxes Payable
559 Miscellaneous Expenses
910 Income Tax Expense
EQUITY
311 Common Stock
331 Retained Farnings

General Journal
1. Prepare all the journal entries of Field to record the 2019 transactions.
General Journal Instructions
GENERAL JOURNAL
DATE
ACCOUNT TITLE
POST. REF.
DEBIT
1
2
3
4
5
6
8

Expert Solution

Step 1

Equity method is an accounting technique of recording the financial transactions related to company’s investment in another company in which it holds a significant influence. Therefore, it can exert the significant influence over the operations and dividend policy of the other company in which it is invested.

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