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andrey2020 [161]
4 years ago
5

Saxton Corporation purchased 25 percent of Taylor Company's voting stock on January 1, 2013, for $18 million in cash. At the dat

e of acquisition, Taylor reported its total assets at $360 million and its total liabilities at $336 million. Investigation revealed that Taylor's plant and equipment (15-year life) was overvalued by $10.8 million and it had an unreported customer database (2-year life) valued at $3 million. Taylor declares and pays $600,000 in dividends and reports net income of $1,500,000 in 2016. Required Prepare the necessary journal entries on Saxton's books to report the above information for 2016 assuming Saxton uses the equity method to report its investment.
Business
1 answer:
12345 [234]4 years ago
8 0

Answer and Explanation:

The Journal entry is shown below:-

a. Cash Dr, $150,000 ($600,000 × 25%)

To Investment in Taylor $150,000

(Being receipts of dividends is recorded)

b. Investment in Taylor $195,000

Equity in net income of Taylor $195,000

(Being earning of the investee is recorded)

Working note:-

Equity in net income of Taylor = Santon's share of Taylor's reported income - Revaluation adjustment

= ($1,500,000 × 25%) - ($10,800,000 ÷ 15 × 25%)

= $375,000 - $180,000

= $195,000

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