Question

Change from the fair value method to the equity method Assume an investor company acquires for $256,000 an 8% investment in the common stock of an investee company on February 15, 2018. The investor determined the common stock of the investee has a readily determinable fair value. On December 31, 2018, the fair value of the 8% common stock investment is $272,000, and the investor company made made all of the appropriate adjustments in preparation of the annual financial statements. On March 1, 2019, the investor company acquires an additional 17% of common stock of the investee for $612,000, thereby increasing the investor's overall ownership interest to 25%.

Required a. Prepare the journal entries the investor company should record on March 1, 2019. Note: If a journal entry is not required, select "N/A" as your answers for the drop-down options and leave the Debit and Credit answers blank (zero).

Answer 1

Date Account title and explanation Debit Credit

March 1 Equity investment $32,000

($612,000/17%)*8% - $256,000)

Unrealized holding gain $32,000

(To adjust the value of equity investment)

Note: On 1 march, value of the investment value is increased which is unrealized based on 31 December fair value