Question

Suppose that on Jan 6, 2018, Excel Motors paid $240,000,000 for its 45% investment in Dynamic Motors. Excel has significant influence over Dynamic after the purchase. Assume Dynamic earned net income of $10,000,000 and paid cash dividens of $15,000,000 to all outstanding stockholders during 2018.

What method should Excel Motors use to account for the investment in Dynamic Motors? Give your reasoning.

Excel Motors should use the (available for sale, consolidation, equity, held-to-maturity) method to account for its investment in Dynamic Motors.

Journalize the following:

Excel motors paid $240,000,000 for its 45% investment in Dynamic Motors

Dynamic paid cash dividens of $15,000,000 to all outstanding shareholders during 2018

Dynamic earned net income of $10,000,000 during 2018

Post all 2018 transactions to the investment T-account. What is its balance after all the transactions are posted? ow would this balance be classified on the balance sheet dated Dec 21, 2018?

Answer 1

Excel motors should use Equity Method to account for the investment in Dyanamic motors because equity method of accounting generally used when an investment results in 20% to 50% stake in another company, unless it can be clearly shown that the investment doesn't result in a significant amount of influence or control.

Here in qusetion it is specifically mention that "Excel has significant influence over Dynamic after the purchase.", so equity method is more beneficail for accounting.

Journalise
(When Paid)
Debit Investment in Dyanamic motors $ 240,000,000
Credit Cash $ 240,000,000

When Dividend Received
Debit Cash Ac $67,50,000
Credit Investment in Dyanamic Motors $67,50,000
When Dynamic Earned Income
Debit Investment in Dyanamic motors  $ 45,00,000
Credit Investment Income $ 45,00,000

Investment In Dyanamic Motors
6 jan 2018 To Cash $240,000,000 By Cash $67,50,000
To Investment Income $45,50,000 By Balance $237,800,000

This balance will be classified as Long term investmnet on the balance sheet date.