Equity Method Transactions and Reporting and Investment Sales Transactions

18. Austin, Inc., acquired 10 percent of McKenzie Corporation on January 1, 2014, for $210,000 although McKenzie’s book value on that date was $1,700,000. McKenzie held land that was undervalued by $100,000 on its accounting records. During 2014, McKenzie earned a net income of $240,000 while declaring and paying cash dividends of $90,000. On January 1, 2015, Austin purchased an additional 30 percent of McKenzie for $600,000.

McKenzie’s land is still undervalued on that date, but then by $120,000. Any additional excess cost was attributable to a trademark with a 10-year remaining life for the first purchase and a 9-year life for the second. The initial 10 percent investment had been maintained at cost because fair values were not readily available. The equity method will now be applied. During 2015, McKenzie reported income of $300,000 and declared and paid dividends of $110,000. Prepare all of the 2015 journal entries for Austin.

Entry One—To record second acquisition of McKenzie stock:

Account Title Debit Credit

Entry Two—To restate reported figures for 2015 to the equity method for comparability:

Account Title Debit Credit


Entry Three—To record income for the year:

Account Title Debit Credit


Entry Four—To record collection of dividends from McKenzie:

Account Title Debit Credit


Entry Five—To record amortization for 2015:

Account Title Debit Credit



32. On January 1, 2013, Plano Company acquired 8 percent (16,000 shares) of the outstanding voting shares of the Sumter Company for $192,000, an amount equal to Sumter’s underlying book and fair value. Sumter declares and pays a cash dividend to its stockholders each year of $100,000 on September 15.

Sumter reported net income of $300,000 in 2013, $360,000 in 2014, $400,000 in 2015, and $380,000 in 2016. Each income figure can be assumed to have been earned evenly throughout its respective year. In addition, the fair value of these 16,000 shares was indeterminate, and therefore the investment account remained at cost.


On January 1, 2015, Plano purchased an additional 32 percent (64,000 shares) of Sumter for $965,750 in cash and began to use the equity method. This price represented a $50,550 payment in excess of the book value of Sumter’s underlying net assets. Plano was willing to make this extra payment because of a recently developed patent held by Sumter with a 15-year remaining life. All other assets were considered appropriately valued on Sumter’s books.


On July 1, 2016, Plano sold 10 percent (20,000 shares) of Sumter’s outstanding shares for $425,000 in cash. Although it sold this interest, Plano maintained the ability to significantly influence Sumter’s decision-making process. Assume that Plano uses a weighted average costing system.


Prepare the journal entries for Plano for the years of 2013 through 2016.

Problem 32, page 35. Journal entries for several years. Includes conversion to equity method and a sale of a portion of the investment:


Account Title





Last Updated on February 11, 2019 by Essay Pro