accounting-On January 1, 2011, the Travis Corporation purchased a 22% interest

QUESTION

Problem
1

On January
1, 2011, the Travis Corporation purchased a 22% interest in Scott Company by
procuring 5,000 shares of the 25,000 outstanding shares of common stock.

The
acquisition price was $32.50 a share. On the date of this procurement, Scott
Company’s net assets were defined as the following:

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The total
liabilities has a book and fair value of $90,000

During 2011,
Scott Company had earned income of $76,000 and paid dividends of

$16,000. The
depreciated items have a useful life of 5 years remaining and no residual
value

Prepare all the necessary journal entries on Travis’s books to
record the acquisition and the events subsequent to the initial investments.

Problem 1

Entries by Travis
Corporation

Fair Value Method
Equity Method

On January 2, 2011 Travis Corporation purchased
5000 shares (?? of Scott Company) at a cost of ???? a share

Equity Investments

Equity Investments

Cash

Cash

For the year 2011, Scott Company reported net
income of ????, Travis Corp’s share is ????

????

Equity Investments

Revenue from Investment
XXXX

Scott
Company paid a cash divident of ????; Travis Corp received ????

Cash
XXXX

Cash
XXXX

Dividend Revenue

XXXX
Equity Investments

XXXX

Payment
of depreciation

Depreciation Expense
XXXX

Depreciation Expense
XXXX

Accumulated Depreciation
XXXX
Accumulated Depreciation
XXXX

Problem 2

Temperance
Company owns stock in several like companies. Investments in some of these
affiliates are accounted for as securities available for sale while some are
accounted for using the equity method.

Use the
information in Problem 2 and answer the following:

• What
factors determine which method should be used?

• What
events are recorded when the equity method is used?

• What
events are recorded when the securities are accounted for as available for
sale?

ANSWER:

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