Question

Exercise 12-25 (Algorithmic)
Fair Value and Equity Methods

Nadal Corporation purchased 8,800 common shares of Beck Inc., on January 1, 2018, for $107,000. During 2018, Beck declared and paid cash dividends to Nadal in the amount of $7,000. Nadal's share of Beck's net income for 2018 was $5,700. At December 31, 2018, the fair value of the 10,000 shares was $122,000. This is Nadal's only investment.

Required:

1. Assume that Beck has 66,000 common shares outstanding. What journal entries will Nadal make during 2018 relative to this investment?

2018, Jan. 1	Investments-Beck Inc.	107,000
	Cash		107,000
	(Record purchase of Beck shares)
2018, Jan. 1	Cash	7,000
	Dividend Income		7,000
	(Record receipt of dividend)
2018, Dec. 31	Investments-Beck Inc.	15,000
	Unrealized Gain (Loss) on fair value		15,000
	(Record adjustment to fair value)

2. Assume that Beck has 35,200 common shares outstanding. What journal entries will Nadal make during 2018 relative to this investment?

2018, Jan. 1	Investments-Equity Method	107,000
	Cash		107,000
	(Record purchase of Beck shares)
2018, Jan. 1	Cash	7,000
	Investments-Equity Method		7,000
	(Record receipt of dividend)
2018, Dec. 31	Investments-Equity Method	?
	Investment Income-Equity Method		?
	(Record Nadal's share of Beck's net income)

Could you write detailed calculation getting 2018 Dec 31 Investments-Equity Method and Investment Income-Equity Method

Answer 1

2. Assume that Beck has 35,200 common shares outstanding.
Here as the holding forms 25% i.e 8,800 / 35,200, we have to use equity method of investment. In this method first investment is taken at purchase cost then adjustments are made as follows:
If dividend is declared and paid by the investee, the share of dividend is reduced from the invesment amount.
If Net Income is declared by the investee, the amount of equity method investment is increased by the share of net income.

Journal entries are as follows:-

2018, Jan. 1	Investments-Equity Method	107,000
	Cash		107,000
	(Record purchase of Beck shares)
2018, Jan. 1	Cash	7,000
	Investments-Equity Method		7,000
	(Record receipt of dividend)
2018, Dec. 31	Investments-Equity Method	5,700
	Investment Income-Equity Method		5,700
	(Record Nadal's share of Beck's net income)

As we are already given the share of net income of Nadal, there is no need of calculation, and directly post the amount of share of net income to journal entry.

If we are given the total net Income of Beck's net income, then we do the calculation which is as follows:
= Net Income of Beck * 25%
25% is the share of holding in beck as calculated above in the answer.