Davison Corporation acquired a 45 % interest in Sean Inc. for $ 370,000 on Janua

Question

Davison Corporation acquired a 45 % interest in Sean Inc. for $ 370,000 on January 1 of the current year. Specifically, Davison acquired 103,500 of the 230,000 voting common shares outstanding. Sean reported net income of S 130,000 at the end of the current year and paid cash dividends of S 30,000 during the current year. At the time of acquisition, the book value of Sean's net assets equaled its market value. Sean's shares were selling for $ 13per share at the end of the current year. a. Prepare all journal entries required to record the transactions indicated assuming that Davison uses b. Determine the carrying value of the investment at the end of the current year assuming that c. Prepare the journal entries required to account for Davison's investment in Sean assuming that the the equity method. Davison uses the equity method investment is classified as available-for-sale.

Explanation / Answer

Equity Investment: It refers to the buying and holding of common or preferred stock by individuals and company in another company. The equity investors receive income in the form of dividends and capital appreciation. Equity method: It is an accounting method which is used to account a company's equity investment(investor) in another company (investee). This method is used when the investor company has a significant influence over the investee company. Under this method, Investor company adjusts the carrying value of the investment for any changes in the investee company's assets. Journal Entries would be: Equity investment a/c…..Dr 166500 (45% x 370000) To Equity Income a/c 166500 Cash a/c…Dr 13500 To Dividend Revenue 13500

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