Additional Problem 4 On January 1, 2017, Metlock Corporation purchased 18% of th

Question

Additional Problem 4

On January 1, 2017, Metlock Corporation purchased 18% of the outstanding voting shares in WLT Corporation for $1,240,000. At the time of purchase, WLT’s net assets were undervalued by $97,600 and had a remaining useful life of 12 years. Both companies had a December 31 year-end. At the end of 2017, WLT reported a net income of $336,000. Also on December 31, 2017, the fair value of the investment in WLT shares was $1,364,000. On January 10, 2018, WLT paid a cash dividend. Metlock’s ownership entitles it to $35,460 of the dividend.

Prepare the journal entries on the books of Metlock Corporation to record the transactions described above, assuming that the 18% interest in WLT does represent significant influence.(Credit account titles are automatically indented when the amount is entered. Do not indent manually. Record journal entries in the order presented in the problem. If no entry is required, select "No Entry" for the account titles and enter 0 for the amounts.)

Explanation / Answer

When a company has significant influene over the investee then we use equity method of accounting.

It is given in the question that Metlock has significant influent in WLT.

in equity method, any profit or loss by investee will be recorded in the books of investor (as per the share) in the period in which it is made through income statement. The Investment amount will be adjusted with that. Futher if investee issued dividend the same will be deducted from the carrying amount of investment.

considering above, the entries are -

On making investment - 1 jan 2017

Investment in WLT A/c Dr. 1,240,000

           To Bank A/c                  1,240,000

(Being investment made)

On Dec 31, WLT made a profit on 336,000 out of which Metlock's share is - 336,000*18% = 60,480

Investment in WLT A/c Dr. 60,480

              To Profit and loss A.c         60,480

(Being profit booked)

Dividend is received on Jan 10

Cash A/c Dr.     35,460

      To Investment in WLT A/c 35,460

(being divided received and thus the carrying amount of investment reduced as per above explanation)

There will not entry for change in fair value on iinvestments.

Ask if there is any dounts.

thanks

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