Q15E_2 - Horngren'S Financial And Managerial Accounting

Question

Accounting for equity investments

Suppose that on January 6, 2018, East Coast Motors paid \(280,000,000 for its 35% investment in Boxcar Motors. East Coast has significant influence over Boxcar after the purchase. Assume Boxcar earned a net income of \)90,000,000 and paid cash dividends of $45,000,000 to all outstanding stockholders during 2018. (Assume all outstanding stock is voting stock.) 

Requirements 

2. Journalize all required 2018 transactions related to East Cost Motors’s Boxcar investment. Include an explanation for each entry.

Step-by-Step Solution

Answer

Both sides of the Journal total $327,250,000.

Definition of Equity Investment

The investment that reflects the amount of shares purchased by the investor in the investee company is known as an equity investment. 

Journal Entry

Date	Accounts and Explanation	Debit $	Credit $
6 Jan 2018	Equity Investment	$280,000,000
	Cash		$280,000,000
31 Dec 2018	Equity investment	$31,500,000
	Revenue from Investment		$31,500,000
31 Dec 2018	Cash	$15,750,000
	Equity Investment		$15,750,000
		$327,250,000	$327,250,000