JLB Enterprises acquired 15% of REB Corporation on January 1, 2020, for $63,000 when the book...

JLB Enterprises acquired 15% of REB Corporation on January 1, 2020, for $63,000 when the book value of REB’s net assets was $360,000. During 2020, REB reported net income of $90,000 and paid dividends of $30,000. On January 1, 2021, JLB purchased an additional 25% of REB for $240,000. Any excess of cost over book value was attributable to goodwill (No amortization). On that same date, JLB changed to the equity method. During 2021, REB reported net income of $120,000 and paid dividends of $45,000.

a. What investment income did JLB record from REB in 2020?

b. What investment income did JLB record from REB in 2021?

c. What journal entry was made on Jan 1 2021 as switch equity method?

d. What was the balance in Equity Investment at December 31, 2021? (Hint: use the amount paid for 25% of REB from JLB to calculate the implied fair value of the original 15% of the investment)

Expert Solution


a.)	Investment income in 2020:-

	Investment income (Dividend )	4,500	(30,000 x 15% )

b.)	Investment income in 2021:-

	Investment Income (Share of net income )	48,000	(120,000 x 40% )

c.)	Date	Account Titles	Debit	Credit
	01-01-2021	Equity Method Investment-REB	240,000
		Cash		240,000

	01-01-2021	Equity Method Investment-REB	144,000
		Stock Investment-REB		144,000
		(63,000 + 81,000 )

d.)	Investment on 1-1-2020	63,000
	Add: Fair value adjustment	81,000
	((240,000 x 15)/25 ) -63,000
	Add: Investment on 01-1-2021	240,000
	Add: Investment Revenue	48,000
	Less: Dividend ( 45,000 x 40% )	18,000
	Balance on December 31,2021	414,000

ekkarill92 answered 1 year ago

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