Question

Equity Method Investment with Basis Differences Several Years LaterSaxton Corporation purchased 25 percent of Taylor Company's voting stock on January 1, 2013, for $3 million in cash. At the date of acquisition, Taylor reported its total assets at $60 million and its total liabilities at $56 million. Investigation revealed that Taylor's plant and equipment (15-year life) was overvalued by $1.8 million and it had an unreported customer database (2-year life) valued at $500,000. Taylor declares and pays $100,000 in dividends and reports net income of $250,000 in 2016.RequiredPrepare the necessary journal entries on Saxton's books to report the above information for 2016 assuming Saxton uses the equity method to report its investment.Enter answers in thousands. For example, $1 million is $1,000 and $100,000 is $100.Calculation of 2016 Equity in Taylor's Net Income:Saxton's share of Taylor's reported income $Answer+/- Revaluation adjustments AnswerEquity in net income of Taylor $Answer General JournalDate Description Debit Credit1/1/16 AnswerCashInvestment in TaylorEquity in net income of Taylor Answer Answer AnswerCashInvestment in TaylorEquity in net income of Taylor Answer Answer12/31/16 AnswerCashInvestment in TaylorEquity in net income of Taylor Answer Answer AnswerCashInvestment in TaylorEquity in net income of Taylor Answer Answer

Answer 1

Calculation of Saxton's equity in Taylor's net Income

Saxton's share of Taylor reported Income $62,500

($250,000 * 25%)

Less: Revaluation adjustment $30,000

($1,800,000/15)*25%

Equity in net income of Taylor $32,500

Saxton's equity in Taylor's net income is $32,500

Preparation of the required Journal entries

Account Titles and Explanation Debit Credit

Cash ($100,000*25%) $25,000

Investment in Taylor $25,000

(To record receipt of dividends)

Investment in Taylor $32,500

Equity in Net Income of Taylor $32,500

(To record earnings of the investee)