Chapter 2 Four Methods of recording an Equity Investment

On January 1, Year 5, Jenstar Corp. purchased 10% of the outstanding common shares of Safebuy Company at a cost of $95,000. Safebuy reported net income of assume this is a
$100,000 and paid dividends of $80,000 for the year ended December 31, Year 5. The fair value of Jenstar’s 10% interest in Safebuy was $98,000 at December 31, Year significant-
5. On January 10, Year 6, Jenstar sold its investment in Safebuy for $99,000. Ignore income tax and assumes that accumulated OCI for the FVTOCI investment is influence
transferred to retained earnings when the investment is sold. investment

FVTPL FVTOCI Cost Method Equity Method

Jan. 1, Year 5
Investment in Safebuy 95000 95000 95000 95000
Cash 95000 95000 95000 95000
To record the acquisition of 10% of Safebuy's shares

Dec. 31, Year 5

Cash (10% × 80,000) 8000 8000 8000 8000
Investment in safebuy 8000
Dividend income 8000 8000 8000
Investment in safebuy 10000
Equity Method Income 10000
Receipt of dividend from Safebuy

Dec. 31, Year 5

Investment in Safebuy (98,000–95,000) 3000 3000
Unrealized gains (reported in net income)
3000
OCI—unrealized gains 3000
To record investment at fair value

Jan. 10, Year 6 99000 99000 99000

Cash 98000 98000 95000
Investment in Safebuy 1000 4000
Gain on sale (reported in net income)
OCI—gain on sale 1000
Record sale of investment

Jan. 10, Year 6

Accumulated OCI—reclassification to retained earnings
4000
Retained earnings—gain on sale of FVTOCI investments
4000
Clear accumulated OCI to retained earnings
Self-Study 1
On January 1, Year 5, High Inc. purchased 10% of the outstanding common shares of Lowe Corp. for $192,000. From High’s perspective, Lowe was a FVTPL investment.
The fair value of High’s investment was $200,000 at December 31, Year 5. On January 1, Year 6, High purchased an additional 25% of Lowe’s shares for $500,000. This
second purchase allowed High to exert significant influence over Lowe. There was no acquisition differential on the date of the 25% acquisition. During the two years,
Lowe reported the following:

Profit Dividends
Year 5 $200,000 $120,000
Year 6   270,000   130,000

Required: Part A Prepare High’s journal entries with respect to this investment for both Year 5 and Year 6

Year 5 FVTPL

Dr Investment in 192K Cash 20k

Cr Cash 192k Cash 12k
Investment Rev 20k
Dr Investment Lo 8K Divend Rev 12k
Cr unrealized Gai 8k

Dr Investmnet FV 500k
Cr Cash 500k

Year 6 Equity Method

cash 45500
Investmnet in lowe 45500

Investment in low 94500

Equity methid reve 94500