QUESTION 5 Not complete Marked out of 1800 Flag question Cha

QUESTION 5 Not complete Marked out of 18.00 Flag question Change from the fair method to the equity method Assume that an investor has accounted for a $300,000 cost, 5% investment in the im estee usingthe fair method (available for sale designation). The following additional information is available Cumulative 8% of the cumulative Profits Cumulative Fair Value Received from Investee Adjustment for 8% Interest y Investee $60,000 $90,000 $140,000 Now, assume that the investor acquires an additional 20% interest in the investee and concludes that it can now exert significant influence over the investee. a. Provide the required journal entries to account for the change from the fair value method to the equity method for the original investment. General Journal Debit Credit to remove the unrealized gain from stockholders\' equity and the fair value adjustment from the investment account to adjust the equity investment to its correct amount at the beginning of the year and to increase the beginning of the year retained earnings for the cumulative equity income that would have been recognized b. Now, assume that the investor has accounted for its investment using the cost method. Provide the required journal entries to account for the change from the cost method to the equity method for the original investment General Journal Debit Credit to adjust the equity investment to its correct amount at the beginning of the year and to increase the beginning of the year retained earnings for the cumulative equity income that would have been recognized

Solution

1 Fair value to Equity Debit Credit a. Unrealised holding gain 140000 AFS fair value adjustment 140000 (To remove the gain from Stockholders\' equity & the fair value adjustment from the investment a/c) b. Investment in Equity(300000+90000-60000) 330000 Retained Earnings(for dividends credited under Fair Value a/cg.) 60000 AFS 300000 Retained Earnings(for revenue from investment in equity) 90000 ie. b. Investment in Equity(90000-60000) 30000 Retained Earnings 30000 (To adjust the equity investment & retained earnings to its correct amount) 2 Cost method to Equity a. NO ENTRY (as there will be no fair value adjustment ) b. Investment in Equity(90000-60000) 30000 Retained Earnings 30000 (To adjust the equity investment & retained earnings to its correct amount)