Question

Austin, Inc., acquired 10 percent of McKenzie Corporation on January 1, 2014 for $313,400. During 2014, McKenzie earned a net income of $287,000 while declaring and paying cash dividends of $108,000. On January 1, 2015, Austin purchased an additional 30 percent of McKenzie for $932,700. The initial 10 percent investment had been maintained at fair value, and the fair value of McKenzie on January 1, 2015 is implied by the second purchase. The equity method will now be applied. During 2015, McKenzie reported income of $368,250 and declared and paid dividends of $138,000.

Write the Journal entries that Austin needs to make during year 2015. Note that Austin needs to (1) switch from Fair Value Method to Equity Method on 1/1/2015, and (2) carry the investment in McKenzie in Equity Method afterwards

purchase additional 30% of McKenzie's stock

2

Convert Available-for-sale Securities into Investment in McKenzie Corporpation

3

Adjust the investment account to reflect the investee's equity

4

Eliminate the unrealized holding gain under Fair Value Method.

5

Recognize McKenzie's Net Income during 2015.

6

Record McKenzie's Dividend paid in 2015

7

Description

Answer 1

Solution

Particular	Amount (Dr)	Amount (Cr)
Investment stock	932700
Cash		932700
(30% stock )
Investment stock	313400
Available for stock		313400
Unrealized holding	28700
Fair value adjustment		28700
Investment stock	147300
Share in revenue		147300
Cash	55200
Investment stock		55200

Particular	Amount (2014	Amount (2015)
Net income	287000	368250
Dividend	108000	138000
Equity earning	28700	147300
Dividend received	10800	10800
Closed to R/L	17900	92100

This change in the method from the fair value to the equity method will have prospective effect. So no entry required for #3. Thank you