Chapter 15, Problem E15.15E

To determine

Concept Introduction:

Equity Method for accounting of Investments:

Equity method of accounting for Investments is used when a company purchase shares of the other company ranging between 20% and 50 %, i.e. when ownership is more than 20 % or more than and less than or equal to 50 % and has significant control over the operations of the company.

The investment account is created and all the income that it earned are added to the investment account and when it received dividend from the company whose shares have been bought, the dividend is subtracted from the investment account.

Requirement 1

The method that East Coast Motors should use to account for the investment

Explanation:

The method that East Coast Motors should use to account for the investment is Equity Method of accounting.

This can be explained as in the given information it is provided that –

1. East Coast Motors hold 35 % in the share capital of Boxcar Motors thus it is ranging between 20% to 50 %

2. East Coast Motors has significant influence over the Boxcar.

Since the two conditions are met, so the best suited method for accounting of investment for East Coast Motors is Equity method.

Requirement 2:

To prepare:

Journal Entries related to the purchase of the share of Boxcar Motors.

Date	Accounts Titles and Descriptions	Debit (Amount in $)	Credit (Amount in $)
2018
Jan-06	Equity Investment – Boxcar Motors	28,00,00,000
	Cash		28,00,00,000
	(To record purchase of shares of Boxcar Motors)
	Equity Investment – Boxcar Motors	31,500,000
	Equity Investment Income		31,500,000
	(To record the East Coast Motors shares of Boxcar Motors' reported income)
	Cash	15,750,000
	Equity Investment – Boxcar Motors		15,750,000
	(To record the receipt of dividends from Boxcar Motors)

To determine

Requirement 3:

To prepare:

Investment T-account for Equity Investment --- Boxcar Motors