On January 6, 2016, Bulldog Co. purchased 37% of the outstanding stock of Gator

Question

On January 6, 2016, Bulldog Co. purchased 37% of the outstanding stock of Gator Co. for $228,000. Gator Co. paid total dividends of $24,600 to all shareholders on June 30. Gator had a net loss of $51,400 for 2016.

Required:

Chart of Accounts

Journal

a. Journalize Bulldog’s purchase of the stock, receipt of the dividends, and the adjusting entry for the equity loss in Gator Co. stock. Refer to the Chart of Accounts for exact wording of account titles.

PAGE 10

JOURNAL

1

2

3

4

5

Adjusting Entries

6

7

Final Questions

B. Compute the balance of Investment in Gator Co. Stock on December 31, 2016.

C. How does valuing an investment under the equity method differ from valuing an investment at fair value?

Under the equity method, the investor will record their proportionate share of the net increase (or decrease) of the book value of the investee resulting from . The fair value method uses to value the investment in the investee. These two methods result in different valuations because the equity method is based upon , while the fair value approach uses . The two methods related to each other over time. While changes in book value can influence market prices, many other variables can influence the market price of a stock.

A. Journalize Bulldog’s purchase of the stock, receipt of the dividends, and the adjusting entry for the equity loss in Gator Co. stock. Refer to the Chart of Accounts for exact wording of account titles. B. Compute the balance of Investment in Gator Co. Stock on December 31, 2016. C. How does valuing an investment under the equity method differ from valuing an investment at fair value?

Explanation / Answer

Answer

1.Journalize Bulldog’s purchase of the stock, receipt of the dividends, and the adjusting entry for the equity loss in Gator Co. stock.:

B.Compute the balance of Investment in Gator Co. Stock on December 31, 2016

Date Account titles Dr Cr January 6, 2016 Investment in Gator Co. Stock $228000 Cash $228000 June 30, 2016 Cash Investment in Gator Co. Stock (24,600*34%) $8364 $8364 December 31, 2016 Loss of Gator Co $17476 Investment in Gator Co. Stock(Net loss) (51400*34%) $17476

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