Timothy Corporation paid $ 505,280 for a 20% share of Griswold Enterprises on Ja
ID: 2589338 • Letter: T
Question
Timothy Corporation paid $ 505,280 for a 20% share of Griswold Enterprises on January 1 of the current year. Griswold reported net income of S 220,000 and declared and paid cash dividends of S 190,000 during the current year. At the time of acquisition, the book value of Griswold's net assets equaled its market value. Finally, Griswold's common shares are valued at $ 2,446,400 at the end of the current year. a. Prepare all journal entries indicated on the books of the Timothy Corporation under the fair value option and equity methods. Assume that Timothy sells the investment for S 510,000 at the beginning of the next year. Prepare the journal entries required to record the sale of the investment under both the fair value option and the equity methods. Prepare a schedule that compares the amount and timing of revenue recognition for the fair value option and the equity methods. b. c.Explanation / Answer
a. 1. Journal entry under equity method - Under equity method investor company records the purchases at its cost and all the earnings earned by the investee company are recorded as increase in investment by investor company. Moreover, anny payment of dividends is treated as decrease in total investment showing in books of investor company.
Journal Entry
Date
Account
Debit
Credit
Jan 1
Investment in Griswold
TO Cash
(Being shares purchased)
505,280
505,280
Dec 31
Investment in Griswold
TO Equity in Griswold
(Being share in income earned)
(220,000 x 20%)
44,000
44,000
Dec 31
Cash
TO Investment in Griswold
(Being dividends received)
38,000
38,000
2. Fair Value - Under Fair value method, initial investment is recorded in the books of investor at cost price only, however the same is adjusted to the fair value at the end of each reporting period. Moreover, any dividends received will be treated as income of investor company.
Fair Value Entry
Date
Account
Debit
Credit
Jan 1
Investment in Griswold
TO Cash
(Being shares purchased)
505,280
505,280
Dec 31
Cash
TO Dividend Income
(Being dividends received)
38,000
38,000
Dec 31`
Loss on Investment
TO Investment in Griswold
(Being increase in equity recorded at fair value)
16,000
16,000
Note: Calculation of investment income/ Loss
Timothy share in common stock = 20%
Value of common stock = $2,446,400
Timothy’s investment value = $2,446,400 x 20% = $489,280
Timothy’s cost = $505,280
Loss in investment at fair value = $489,280 – 505,280 = $16,000
B. 1. Sale of Investment under equity method
Account
Debit
Credit
Cash
Loss on sale of investment
To Investment in Griswold (Note below)
510,000
1,280
511,280
NOTE: Calculation of carrying value of investment
Carrying Value = $505,280 + 44,000 – 38,000 = $511,280
Loss on sale = $510,000 – 511,280 = $1,280
2. Sale of Investment under fair value method
Account
Debit
Credit
Cash
To Investment in Griswold (Note below)
TO Gain on sale of investment
510,000
489,280
20,720
Note: Under fair value method, carrying value of the investment is accounted on the basis of fair value i.e. 20% x 2,446,400 = $489,280
C. Schdule for revenue recognition
Revenue Recognition
Revenue type
Equity method
Fair Value
Dividend Income
Not recorded as income, rather booked as decrease in value of investment. Revenue is recognized as gain on sale of investment
At the time of payment of dividend.
Net income earned
Revenue is not booked in the books of investor company rather it increases value of investment
Not booked at all
Change in fair value
Not booked
At each reporting date, fair value is checked and booked in accounts.
Sale of Investment
Gain or loss is booked at the time of sale only on the basis of total investment value considering dividend & net income share
Gain or loss is booked at the time of sale only on the basis of fair value of investment.
Date
Account
Debit
Credit
Jan 1
Investment in Griswold
TO Cash
(Being shares purchased)
505,280
505,280
Dec 31
Investment in Griswold
TO Equity in Griswold
(Being share in income earned)
(220,000 x 20%)
44,000
44,000
Dec 31
Cash
TO Investment in Griswold
(Being dividends received)
38,000
38,000
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