Question

On January 1, 2017, Fisher Corporation purchased 40 percent (80,000) of the common stock of Bowden, Inc., for $1,100,000 in cash and began to use the equity method for the investment. The price paid represented a $100,000 payment in excess of the book value of Fisher's share of Bowden's underlying net assets. Fisher was willing to make this extra payment because of a recently developed patent held by Bowden with a 10-year remaining life. All other assets were considered appropriately valued on Bowden's books.

Bowden declares and pays a $150,000
cash dividend to its stockholders each year on September 15. Bowden reported net income of $450,000 in 2017 and $425,000
in 2018. Each income figure was earned evenly throughout its respective years. On Dec, 31st 2017 Fisher sold a 20% stake (20,000 shares or 8% of Winston outstanding shares) of Bowden's outstanding shares for $485,000 in cash.
Although it sold this interest, Fisher maintained the ability to significantly influence Bowden' decision-making process. In 2018, his ownership decreased to 32%. Additionally, in 2018 inventory was sold to the investee by the investor with a profit of 70,000 and 30% remained unsold.
Prepare the equity method journal entries for Fisher for the years of 2017 and 2018

Answer 1

To prepare the equity method journal entries for Fisher Corporation for the years 2017 and 2018, we need to account for its investment in Bowden, Inc., dividends received, and any additional transactions.

**2017:**

1. Initially, Fisher purchased 40% of Bowden, Inc. on January 1, 2017, for $1,100,000 in cash. Since Fisher began using the equity method, we need to record this investment:

**Investment in Bowden, Inc. (Asset)** $1,100,000

**Cash (Outflow)** $1,100,000

2. During the year, Bowden reported net income of $450,000. Fisher's share of this income (40%) should be recognized:

**Share of Bowden's Net Income** $180,000

**Investment in Bowden, Inc. (Asset)** $180,000

3. Bowden declared and paid a $150,000 cash dividend. Fisher's share of this dividend should reduce the investment:

**Cash (Inflow)** $60,000

**Investment in Bowden, Inc. (Asset)** $60,000

**2018:**

4. On December 31, 2017, Fisher sold 20% of Bowden's outstanding shares for $485,000 in cash. Although it sold this interest, Fisher maintained significant influence. This is treated as a partial disposal:

**Cash (Inflow)** $485,000

**Investment in Bowden, Inc. (Asset)** $485,000

5. During 2018, Bowden reported net income of $425,000. Fisher's share of this income (32% due to the sale of shares) should be recognized:

**Share of Bowden's Net Income** $136,000

**Investment in Bowden, Inc. (Asset)** $136,000

6. Inventory was sold to Bowden by Fisher with a profit of $70,000, and 30% remained unsold. This profit needs to be recognized, but only on the portion that was sold:

**Investment in Bowden, Inc. (Asset)** $21,000

**Share of Bowden's Net Income** $21,000

Remember that these entries are simplified for illustrative purposes, and you should consult with an accountant or financial expert for precise accounting treatment and to ensure compliance with accounting standards. Additionally, tax considerations may also apply.