Question

. Fill in the dollar changes (amount of increase or decrease) caused in the Investment account and Dividend Revenue or Investment Income (Revenue) account by each of the following transactions, assuming the Sun Company uses (a) the fair value method and (b) the equity method for accounting for its investment in the Moon Company. (40 pts)

(a)Fair Value method                    (b) Equity Method

  Investment         Dividend            Investment       Dividend

   Account              Revenue           Account             Revenue

Transaction_________________________________________________________________________

1) At the beginning of Year 1, Sun

Bought 30% of Moon’s common

stock at its book value , $1,600,000.

2) During Year 1, Moon reported

$80,000 of net income and paid

$40,000 of dividends.

3) During Year 2, Moon reported

$30,000 of net income and paid

$40,000 of dividends.

4) During Year 3, Moon reported a

net loss of $20,000 and paid $8,000

of dividends.

5) Indicate the Year 3 ending balances

in the Investment account and

cumulative totals for Year 1, 2, and 3

for dividend revenue and investment

income (revenue).

Answer 1

	a) Fair Value		b) Equity Method
Transactions	Investment Account	Dividend Revenue	Investment Account	Dividend Revenue
1) At the beginning of Year 1, Sun Bought 30% of Moon’s common stock at its book value , $1,600,000.	$ 1,600,000		$ 1,600,000
2) During Year 1, Moon reported $80,000 of net income and paid $40,000 of dividends.		$ 12,000	$ 24,000	$ 12,000
3) During Year 2, Moon reported $30,000 of net income and paid $40,000 of dividends.		$ 12,000	$ 9,000	$ 12,000
4) During Year 3, Moon reported a net loss of $20,000 and paid $8,000 of dividends.		$ 2,400	$ -6,000	$ 2,400
5) Indicate the Year 3 ending balances in the Investment account and cumulative totals for Year 1, 2, and 3 for dividend revenue and investment income (revenue).	$ 1,600,000	$ 26,400	$ 1,627,000	$ 26,400