4. • On 1/1/2017, The X Company purchased 70% of the Y Company for $17,000,000.

Question

4.

•

On 1/1/2017, The X Company purchased 70% of the Y Company for

$17,000,000. It prepares consolidated financial statements that

include the Y Company.

•

The X Company also prepares financial statements in which it

accounts for its investment in the Y Company using the equity

method.

•

During 2017, the Y Company earned $1,000,000 and paid

dividends of $400,000.

•

On 12/31/2017 shares of Y Company that were publicly traded

implied a total market value of Y Company of $28,000,000

a. Make the JE to record the purchase of Y Company

b. Make the JE to record Y Company 2017 income, if necessary

c. Make the JE to record the dividends received from Y Company in

2017

d. Make the JE to record the change in the market value of X

Company’s investment in Y Company as of 12/31/2017, if necessary

Explanation / Answer

a)

Investment in Y Dr 17000000

Cash Cr 17000000

b)

Investment in Y Dr 700000 (1000000*70% = 700000)

Equity income in Y Cr 700000

c)

Cash Dr 280000

Investment in Y Cr 280000 (400000*70% = 280000)

d)

Fair value of company Y as on 31st December,2017 = 28000000

Share of Company X in Y as on 31st December,2017 = 28000000*70% = 19600000

Share of Company X at current cost = 17000000 + 700000 - 280000 = 17420000

Equity income earned by X = 19600000 - 17420000 = 2180000

Journal:

Investment in Y Dr 2180000

Equity income in Y Cr 2180000

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