Saxton Corporation purchased 30 percent of Taylor Company’s voting stock on Janu

Question

Saxton Corporation purchased 30 percent of Taylor Company’s voting stock on January 1, 2016, for $4 million in cash. At the date of acquisition, Taylor reported its total assets at $80 million and its total liabilities at $74 million. Investigation revealed that Taylor’s plant and equipment (10-year life) was overvalued by $2 million and it had an unreported customer database (3-year life) valued at $700,000. Taylor declares and pays $150,000 in dividends and reports net income of $325,000 in 2019.

Required
Prepare the necessary journal entries on Saxton’s books to report the above information for 2019 assuming Saxton uses the equity method to report its investment.

Explanation / Answer

Journal Entries in Saxton in 2019: Date Accounts Title Debit $ Credit $ Dec 31 2019 Equity investment in Taylor 97500 Taylor's Net Income 97500 (being 30% of Taylor Net Income is booked in investment account) Dec 31 2019 Cash 45000 Equity investment in Taylor 45000 (being dividend received adjusted to investment account) Dec 31 2019 Depreciation (P&M) 200000 Equity investment in Taylor 200000 (being the overvalued P&M adjusted to investment account 2m / 10 years = 200000)

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