Question

Equity Method for Stock Investment with Loss

On January 6, Year 1, Bulldog Co. purchased 28% of the outstanding stock of Gator Co. for $172,000. Gator Co. paid total dividends of $20,600 to all shareholders on June 30. Gator Co. had a net loss of $32,700 Year 1.

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

Jan. 6 - Purchase
June 30 - Dividend
Dec. 31 - Equity Loss

b. Compute the balance of Investment in Gator Co. Stock on December 31, Year 1.
$

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

Under the   method, the investor will record their proportionate share of the net increase (or decrease) of the book value of the investee resulting from earnings and dividend distributions. The   method uses market price information to value the investment in the investee.

Answer 1

a
Jan. 6 - Purchase	Investment in Gator Co. stock	172000
	Cash		172000
June 30 - Dividend	Cash	5768		=20600*28%
	Investment in Gator Co. stock		5768
Dec. 31 - Equity Loss	Loss of Gator co.	9156		=32700*28%
	Investment in Gator Co. stock		9156
b
	Investment in Gator Co. Stock on December 31, Year 1	157076		=172000-5768-9156
c
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 earnings and dividend distributions. The fair value method uses market price information to value the investment in the investee.