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Solution to in-class example Ch 1

Solution to in-class example Ch 1 - Ch 1 The Equity Method...

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Ch 1: The Equity Method of Accounting for Investment (ASC 323) ACCT 501, SP 12 1. Example 1: Pepper acquires 100% of Salt on January 1, 2010 for \$12,000,000 and uses the equity method to account for its investment in Salt. On the date of acquisition, there is no significant difference between the fair market value and the book value of Salt’s identifiable net assets. Salt reports net income of \$600,000 in 2010 and \$500,000 in 2011. Salt declares and pays a cash dividend of \$150,000 on December 1 in 2010. Salt pays no dividend in 2011. Required: 1) Record the purchase of equity investment on 1/1/2010. 1/1/2010: Dr: Investment in Salt 12,000,000 Cr: Cash 12,000,000 2) Record the amount of equity income Pepper would have recognized in 2010 from its ownership interest in Salt. 12/31/2010: Dr: Investment in Salt 600,000 Cr: Equity in income of Salt 600,000 3) Record Pepper’s share of Salt’s dividends in 2010. 12/1/2010: Dr: Cash 150,000 Cr: Investment in Salt 150,000 4). Record Pepper’s Investment balance in Salt in 2010 and 2011. 2010: 12,000,000 + 600,000 – 150,000 = \$12,450,000 2011: 12,450,000 + 500,000 – 0 = \$12,950,000

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Ch 1: The Equity Method of Accounting for Investment (ASC 323) ACCT 501, SP 12 2 Example 2: Pepper acquires 100% of Salt on January 1, 2010 for \$12,000,000 and uses the equity method to account for its investment in Salt. Salt reports total assets of \$24 million and
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Solution to in-class example Ch 1 - Ch 1 The Equity Method...

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