Mr. Hansen's purchase of the stock of LifePath Fitness was done through his business. The stock...

Mr. Hansen's purchase of the stock of LifePath Fitness was done through his business. The stock investment has always been accounted for using the cost method on his firm's books. However, early in 2019 he decided to take his company public. He is preparing an IPO (initial public offering), and he needs to have the firm's financial statements audited. One of the issues to be resolved is to restate the stock investment in LifePath Fitness using the equity method since Mr. Hansen's ownership percentage is greater than 20%.

Instructions

(e) (1) Give the entries that would have been made on Hansen's books if the equity method of accounting for investments had been used from the initial investment through 2018. Assume the following data for LifePath.

	2016	2017	2018
Net income	$30,000	$70,000	$105,000
Total cash dividends	$?2,100	$20,000	$?50,000

(2)

Compute the balance in the Stock Investment account (as it relates to LifePath Fitness) at the end of 2018.

Expert Solution

Note: I have assumed that the Investment is 20% as it is not mentioned in the question.

	Account Description	Debit	Credit
2016	Cash	420.00
	Investment In Lifepath		420.00
	(Being cash dividend of $3 per share received)

2016	Investment In Lifepath	6,000.00
	To Revenue from Investment		6,000.00
	(Being Income from Investment Recognised)

2016	Cash	4,000.00
	Investment In Lifepath		4,000.00
	(Being cash dividend of $3 per share received)

2016	Investment In Lifepath	14,000.00
	To Revenue from Investment		14,000.00
	(Being Income from Investment Recognised)

2016	Cash	10,000.00
	Investment In Lifepath		10,000.00
	(Being cash dividend of $3 per share received)

2016	Investment In Lifepath	21,000.00
	To Revenue from Investment		21,000.00
	(Being Income from Investment Recognised)

2.

Please note the Value of Investment is not Given in the question so it is blank while computation.

Stock Investment account	Amount
Purchase Price
Dividend-2016	(420.00)
Share of Net Income-2016	6,000.00
Dividend-2017	(4,000.00)
Share of Net Income-2017	14,000.00
Dividend-2018	(10,000.00)
Share of Net Income-2018	21,000.00
Total Balance	26,580.00

Please comment me the missing details. I will update the answer if required by you.

ekkarill92 answered 1 year ago

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