question archive as a long-term investment at the beginning of the fiscal year, Hat Inc
as a long-term investment at the beginning of the fiscal year, Hat Inc
Subject:AccountingPrice:2.84 Bought5
as a long-term investment at the beginning of the fiscal year, Hat Inc. purchased 35% of Glove Inc.'s 12 million common shares (voting stock) for 73 million. The fair value and book value of the shares were the same at that time. during the year, Glove inc. earned net income of 20 million and distributed cash dividends of $1.10 per share. at the end of the year, the fair value of the shares is 59 million.
1. what method would be appropriate to account for this investment? Why?
2. prepare the appropriate journal entry for the purchase of this investment.
3. prepare the appropriate journal entry (if needed) to reflect the dividends paid
prepare the appropriate journal entry( in needed) to reflect the net income earned by glove Inc. for the year.
4. prepare the appropriate journal entry (if needed) to reflect the fair market value of the shares at year end.
5. prepare the appropriate journal entry (if needed) to reflect the fair market value of the shares at your end.
6. what is the carrying value of this investment at year end?
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Equity method
Equity method is an accounting approach that is used by the company to evaluate the profits earned from the investments made in the other companies. The profits earned from the investments is based on the company’s share on other companies assets. The company reports this profit earned from investments in other companies on its income statement.
Part - 2 to 6
Prepare the appropriate journal entries for Company Hat Inc for the purchase of equity of glove Inc.
| Date | particular | Debit(in millions) | Credit(in millions) |
| 1) | Investment in glove Inc's common stock | 73 | |
| Cash | 73 | ||
| (To record the investment in glove Inc) | |||
| 2) | Investment in glove Inc's common stock | 7 | |
| Investment revenue | 7 | ||
| [ 20 million * 35% ] | |||
| ( share in net income) | |||
| 3) | Cash | 4.62 | |
| Investment in glove inc's common stock | 4.62 | ||
| ( To record share in dividend received) | |||
| [ 12 million share * 35%] * (1.10 per share) = 4.62 |
Explanation:
Record the investment in glove Inc.
• Investment in glove Inc Common Stock is a component of Stockholders’ equity. There is a decrease in the stockholders equity by $73 million. Therefore, Investment in glove Inc Common Stock is debited with $73 million.
° Cash is an asset. There is a decrease in assets by $73million. Therefore, cash account is credited with $73million.
Record the share of net income reported by glove inc.
• Investment in glove Inc Common Stock is a component of Stockholders equity. There is a decrease in the stockholders equity by $7 million. Therefore, Investment in glove Inc Common Stock is debited with $7 million.
• Investment Revenue is a component of Stockholders equity. There is an increase in the stockholders equity by $7 million. Therefore Investment Revenue account is credited with $7million.
Record the share of dividends received from glove Inc
° Cash is an asset. There is an increase in assets by $4.62 million. Therefore cash account is debited with $4.62million.
• Investment in glove Inc Common Stock is a component of Stockholders equity. There is an increase in the stockholders equity by $4.62million. Therefore, Investment in glove Inc Common Stock is debited with $4.62million.
