Question

On January 6, Year 1, Bulldog Co. purchased 30% of the outstanding stock of Gator Co. for $205,200. Gator Co. paid total dividends of $26,900 to all shareholders on June 30. Gator had a net loss of $52,300 for Year 1.

Required:

A.	Journalize Bulldog’s purchase of the stock, receipt of the dividends, and the adjusting entry for the equity loss in Gator Co. stock. Refer to the Chart of Accounts for exact wording of account titles.
B.	Compute the balance of Investment in Gator Co. Stock on December 31, Year 1.
C.	How does valuing an investment under the equity method differ from valuing an investment at fair value?

Journal

a. Journalize Bulldog’s purchase of the stock, receipt of the dividends, and the adjusting entry for the equity loss in Gator Co. stock. Refer to the Chart of Accounts for exact wording of account titles.

PAGE 10

JOURNAL

ACCOUNTING EQUATION

	DATE	DESCRIPTION	POST. REF.	DEBIT	CREDIT	ASSETS	LIABILITIES	EQUITY
1
2
3
4
5		Adjusting Entries
6
7

Final Questions

B. Compute the balance of Investment in Gator Co. Stock on December 31, Year 1.

Answer 1

Bulldog's share of dividends= 30%* $26900*1/2= $4035
Pre acquisition dividend= 30%* $26900*1/2= $4035
Bulldog's share in net loss of Gator= $52,300*6/12= $26,150

a. Journalize Bulldog's purchase of the stock, receipt of the dividends, and the adjusting entry for the equity loss in Gator Co. stock.

Solution-

Date	Account Titles and Explanation	Amount (Debit)	Amount (Credit)
January 6, Year 01	Investment in Gator Co. Stock	$205,200
	Cash		$205,200
June 30, Year 01	Cash	$8,070
	Investment in Gator Co. Stock (26,900*30%)		$8,070
December 31, Year 01	Loss of Gator Co	$15,690
	Investment in Gator Co. Stock (Record 30% share of Gator Co. net loss, $52,300*30%)		$15,690

b. Compute the balance of Investment in Gator Co. Stock on December 31, Year 01

Solution-

Balance of Investment in Gator Co. Stock on December 31, Year 01.
Initial acquisition cost	$205,200
Equity loss for 2014	($8,070)
Cash dividends received	($15,690)
Investment in Gator Co. Stock balance, December 31, Year 01.	$181,440

C)

Under the equity method, the investor will record their proportionate Share of net increase (or decrease) of the book value of the investee resulting from earnings and dividend distributions. The Fair value method uses market price information to value the investment in the investee .