Question

We purchased another 20% of Uncle Company for $300,000 (bringing our ownership up to 60%). The total fair value of Uncle company is $1,500,000. The correct balance in the Investment in Uncle account on 12/31/18 was $275,350, and the correct balance in the Investment in Cousin account on 12/31/18 was $20,000. We plan on holding our investment Uncle for the foreseeable future, though we could sell it if we need the cash. (It has continued to do well; we estimate the Uncle Company stock was worth $1,250,000 as of December 31, 2019!).

This investment activity occurred on Jan. 1 2019. What is the journal entry (equity method) for the purchase of Uncle Company?

Answer 1

Ans:

Under Equity method when an investor make investment in stock of a company it must record the Investment at its purchase cost. Any income earned by the company will be added to investment value and subsequently dividends paid are subtracted.

Here purchase are made for held as investment and accounting as per Equity Method is required:

So required Journal Entry would be:

Date	Account Title	Debit	Credit
Jan 1 2019	Investment	$300,000
	Cash		$300,000

  

Note : Fair value of Stock will not be considered relevant for purchase for investment to be recorded under Equity Method of purcahse.

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