Question

Accounting for equity investments On January 6, 20Y8, Bulldog Co. purchased 34% of the outstanding common stock of Gator Co. for $175,000. Gator Co. paid total dividends of $20,000 to all shareholders on June 30, 20Y8. Gator had a net loss of $55,000 for 20Y8. Question Content Area a. Journalize Bulldog's purchase of the stock, receipt of the dividends, and the adjusting entry for the equity loss in Gator Co. stock. If an amount box does not require an entry, leave it blank. DateAccountDebitCredit 20Y8 Jan. 6 20Y8 June 30 20Y8 Dec. 31 Question Content Area b. Compute the balance of Investment in Gator Co. Stock on December 31, 20Y8. fill in the blank 1 of 1$ c. How does valuing an investment under the equity method differ from valuing an investment at fair value? Under the equity method, the fill in the blank 1 of 10 will record its proportionate share of the net increase (or decrease) of the fill in the blank 2 of 10 of the fill in the blank 3 of 10 resulting from earnings and dividend distributions. The fair value method uses fill in the blank 4 of 10 information to value the investment in the fill in the blank 5 of 10 . These two methods result in different valuations because the equity method is based on fill in the blank 6 of 10 while the fair value approach uses fill in the blank 7 of 10 . The two methods fill in the blank 8 of 10 be related to each other over time. While changes in book value fill in the blank 9 of 10 influence market prices, many other variables fill in the blank 10 of 10 influence the market price of a stock.

Answer 1

a. Journal entries:

Jan. 6, 20Y8

Investment in Gator Co. Stock 175,000

Cash 175,000

June 30, 20Y8

Cash 6,800 (34% x $20,000)

Investment in Gator Co. Stock 6,800

Dec. 31, 20Y8

Investment in Gator Co. Stock 18,700 (34% x $55,000)

Equity Loss in Gator Co. Stock 18,700

b. The balance of Investment in Gator Co. Stock on December 31, 20Y8, is $163,100

c. Under the equity method, the investor records its proportionate share of the net increase (or decrease) of the investee's net income resulting from earnings and dividend distributions.

a. Journal entries:

Jan. 6, 20Y8

Investment in Gator Co. Stock 175,000

Cash 175,000

June 30, 20Y8

Cash 6,800 (34% x $20,000)

Investment in Gator Co. Stock 6,800

Dec. 31, 20Y8

Investment in Gator Co. Stock 18,700 (34% x $55,000)

Equity Loss in Gator Co. Stock 18,700

b. The balance of Investment in Gator Co. Stock on December 31, 20Y8, is $163,100 ($175,000 + $6,800 - $18,700).

c. Under the equity method, the investor records its proportionate share of the net increase (or decrease) of the investee's net income resulting from earnings and dividend distributions. The fair value method uses market information to value the investment in the company. These two methods result in different valuations because the equity method is based on the investor's share of the investee's earnings, while the fair value approach uses market prices. The two methods can be related to each other over time. While changes in book value may influence market prices, many other variables can influence the market price of a stock.