Answer:
1. What method should Excel Motors use to account for the investment in Dynamic Motors?
equity method since Excel Motors exercises significant influence (more than 20% of outstanding stocks) over Dynamic Motors
2. Journalize all required 2018 transactions related to Excel Motors's Dynamic investment. Include an explanation for each entry.
January 6, 2018, investment in Dynamic Motors
Dr Investment in Dynamic Motors 240,000,000
Cr Cash 240,000,000
Sometime during 2018, cash dividends are distributed
Dr Cash 6,750,000
Cr Investment in Dynamic Motors 6,750,000
Under equity method, cash dividends decrease investment account
December 31, 2018, net income is reported
Dr Investment in Dynamic Motors 4,500,000
Cr Investment revenue 4,500,000
Under equity method, net income increases investment account
3. Post all 2018 transactions to the investment T account. What is its balance after all transactions are posted? How would be this balance be classified on the balance sheet dated December 31 2018?
Investment in Dynamic Motors
debit credit
240,000,000 (January 6, 2018)
6,750,000 (sometime during 2018)
4,500,000 (December 31, 2018)
$237,750,000 ⇒ Investment account should be reported as a non-current asset account.
Cash
debit credit
240,000,000 (January 6, 2018)
6,750,000 (sometime during 2018)
$233,250,000 ⇒ negative balance since we were not given the initial cash amount. Cash is a current asset account.
Investment revenue
debit credit
$4,500,000 (December 31, 2018)
*Revenues are not reported on the balance sheet, but they do increase retained earnings account.