Question

On January 6, Year 1, Bulldog Co. purchased 34% of the outstanding stock of Gator Co. for $180,300. Gator Co. paid total dividends of $20,100 to all shareholders on June 30. Gator had a net loss of $54,700 for Year 1. Required: A. Journalize Bulldog’s purchase of the stock, receipt of the dividends, and the adjusting entry for the equity loss in Gator Co. stock. Refer to the Chart of Accounts for exact wording of account titles. B. Compute the balance of Investment in Gator Co. Stock on December 31, Year 1. C. How does valuing an investment under the equity method differ from valuing an investment at fair value?

Answer 1

investment on Gator Co 180,300 debit

cash 180,300 credit

--- to recrod purchase ---

cash 6,834 debit

Investment on Gator Co 6,834 credit

--- dividends paid ---

loss on investment 18,598 debit

Investment on Gator Co 18,598 credit

--- loss on investment ---

Balance at Dec 31th

Investment on Gator Co: 154,868‬

On equity method we reflect on the investment change in equity, as the cash dividends decrease the equity on Gaitor we decrease our investment valuation

When the company recognize income or losses we also adjust for the value of the equity

This is a substancial differnece with fair value on which we simply adjust by the market value of the stocks and the cas dividends are considered gains regardless of the income/loss of the period.

Step-by-step explanation:

dividends: 20,100 x 34% = 6,834

income: 54,700 x 34% = 18,598‬

balance

180,300 - 6,834 - 18,598 = 154,868‬