Question

Write the journal entries for the following transactions under both equity method and fair value method.

Transaction 1: (1/1/2001) Company A invests $700,000 (cash) in the investee Company B.

Fair value method:

Equity method:

Transaction 2:At the end of the year (12/31/2001), there is a $20,000 difference between market value and book value of the investment (FV>BV).

Fair value method:

Equity method:

Transaction 3: At the end of the year (12/31/2001), company B reports $100,000 profit.

Fair value method (assuming the investment is 10% of the company's outstanding shares):

Equity method (assuming the investment is 30% of the company's outstanding shares):

Transaction 4: A receives cash dividends in the amount of $10,000 (1/31/2002).

Fair value method:

Equity method:

Answer 1

Fair Value Method
Date	Account Titles	Debit $	Credit $
1/1/2001	Investment in Company B	700,000
	Cash		700,000
12/31/2001	Fair Value adjustment	20,000
	Unrealized holding gain or loss		20,000
12/31/2001	No Entry
1/31/2002	Cash	10,000
	Dividend Revenue		10,000
Fair Value Method
Date	Account Titles	Debit $	Credit $
1/1/2001	Investment in Company B	700,000
	Cash		700,000
12/31/2001	No Entry
12/31/2001	Investment in Company B	30,000
	Investment Revenue		30,000
	(100,000 x 30% )
1/31/2002	Cash	10,000
	Investment in Company B		10,000