Question

On January 1, 2017, Fisher Corporation purchased 40 percent (74,000 shares) of the common stock of Bowden, Inc. for $980,000 in cash and began to use the equity method for the investment. The price paid represented a $66,000 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 15-year remaining life. All other assets were considered appropriately valued on Bowden's books.

-Bowden declares and pays a $94,000 cash dividend to its stockholders each year on September 15. Bowden reported net income of $408,000 in 2017 and $356,000 in 2018. Each income figure was earned evenly throughout its respective year.
-On July 1, 2018, Fisher sold 10 percent (19,500 shares) of Bowden's outstanding shares for $328,000 in cash. Although it sold this interest, Fisher maintained the ability to significantly influence Bowden's decision-making process.

Required:
Prepare the journal entries for Fisher for the years of 2017 and 2018.

Answer 1

Investment in Bowden Inc. (Dr.) $980,000

Cash (Cr.) $980,000

Dividend receivable 94,000 * 40% (Dr.) $37,600

Investment in Bowden (Cr.) $37,600

Cash (Dr.) $37,600

Dividend Receivable (Cr.) $37,600

Investment in Bowden 408,000 *40% (Dr.) $163,200

Income From Bowden (Cr.) $163,200

Investment in Bowden 365,000 * 6/12 * 40% (Dr.) $71,200

Income from Bowden (Cr.) $71,200

Investment in Bowden 365,000 * 6/12 * 10% (Dr.) $17,800

Income from Bowden (Cr.) $17,800

Cash (Dr.) 328,000

Gain on Investment (Cr.) $69,756

Investment in Bowden (Cr.) $258,243

Step-by-step explanation:

Gain on investment in Bowden :

Investment value $980,000

Total number of shares 74,000

Per share value 980,000 / 74,000 = 13.24

Sold 19,500 shares

Value of shares sold : 19,500 shares * 13.24 per share = $258,243

Sale price for shares = $328,000

Gain on Sale of investment = $69,756