Question

Matrix, Incorporated, acquired 25% of Neo Enterprises for $2,000,000 on January 1, 2024. The fair value and book value of 25% of Neo’s identifiable net assets was $2,000,000 and $1,600,000 on that date, and the difference was attributable to assets that would be depreciated over 10 years. During 2024 Neo recognized net income of $500,000 and paid dividends of $400,000. Neo had a total fair value of $10,000,000 as of December 31, 2024.

Prepare the journal entries necessary to account for the Neo investment, assuming that Matrix accounts for that investment as an equity-method investment.

Answer 1

To account for the Neo investment using the equity-method, Matrix, Incorporated would make journal entries for the acquisition, equity in net income, dividends received, and investment adjustment.

Step-by-step explanation:

To account for the Neo investment using the equity-method, Matrix, Incorporated would make the following journal entries:

• On January 1, 2024, when acquiring the 25% of Neo Enterprises:
  • Debit: Investment in Neo Enterprises - $2,000,000
  • Credit: Cash - $2,000,000
• At the end of 2024, to recognize the equity in Neo's net income:
  • Debit: Investment in Neo Enterprises - $125,000 (25% x $500,000)
  • Credit: Equity in Net Income of Neo Enterprises - $125,000
• At the end of 2024, to recognize the dividends received from Neo:
  • Debit: Cash - $100,000 (25% x $400,000)
  • Credit: Investment in Neo Enterprises - $100,000
• At the end of 2024, to adjust the carrying value of the investment:
  • Debit: Equity in Net Income of Neo Enterprises - $25,000 (25% x $100,000)
  • Credit: Investment in Neo Enterprises - $25,000