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9) On January 1, 2021, Mathers Corp. acquired a 35% interest in David Inc. for $275,000....

9) On January 1, 2021, Mathers Corp. acquired a 35% interest in David Inc. for $275,000. On that date, David’s balance sheet disclosed net assets of $400,000. During 2021, David reported net income of $120,000 and paid cash dividends of $37,000. Mathers sold inventory costing $45,000 to David during 2021 for $55,000. David used all of this merchandise in its operations during 2021. Any excess cost over fair value is attributable to an unamortized trademark with a 20-year remaining life.

Required: Prepare all of Mather’s journal entries for 2021 to apply the equity method to this investment.


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Answer #1
Account Titles Debit Credit
Investment in David Inc 275000
Cash 275000
Investment in David Inc 42000
Equity in Investee Income 42000
[120,000*35%]
Cash 12950
Investment in David Inc 12950
[37000*35%]
Equity in Investee Income 6750
Investment in David Inc 6750
Investment in David Inc 3500
Equity in Investee Income 3500
[(55000-45000)*35%]

Working Note;

Acquisition price 275000
Less: Value of assets(400000*0.35) 140000
Trademark 135000
Useful life 20
Amortization per year 6750

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