On January 1, 2015, Red Raiders Corp. acquired 15,000 of the outstanding common

Question

On January 1, 2015, Red Raiders Corp. acquired 15,000 of the outstanding common stock of Rams Corp. for $600,000. At the time of the purchase, Rams had outstanding 60,000 shares with a book value of $2,400,000. On December 31, 2015 the following events took place:

Rams reported a net loss of $250,000 for the calendar year 2015.

Red Raiders received from Rams a dividend of $0.10 per share of common stock.

The fair value of Rams stock temporarily declined to $38 per share.

Give the entries that would be required to reflect the purchase and subsequent events on the books of Red Raiders assuming that the equity method is appropriate.

Explanation / Answer

On the books of Red Raiders Corp. :

There would be no entry to reflect the temporary decline in fair value under the equity method, unlike investments in trading or available-for-sale securities.

Date Account Titles Debit Credit $ $ January 1, 2015 Equity Investment: Rams. Corp 600,000 Cash 600,000 To record investment in associate December 31, 2015 Loss on Investment ( 15,000 / 60,000 x $ 250,000) 62,500 Equity Investment: Rams Corp. 62,500 To record share of loss of associate December 31, 2015 Cash ( 15,000 x $ 0.10) 1,500 Equity Investment: Rams Corp. 1,500 To record receipt of dividend from associate

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