Accounting for Equity Investments

Competition Company purchases all of the stock of Piano Corp. for $4,500 on January 1st. The reported book values of Piano's net assets equal their fair values. Piano's balance sheet on the date of purchase is as follows:

Accounts receivable	$450	Mortgage payable	$450
Inventories	900
Building	3,600	Stockholders' equity	4,500
Total assets	$4,950	Total liabilities and equity	$4,950

During the year, Piano reports net income of $900 and pays $270 in dividends to Competition.

Required

a. Provide the following journal entries on Competition's books: 1. Record the recognition of Equity Income. 2. Record the receipt of dividends from Piano.

		Debit	Credit
1.	(Choice of Cash, Equity Income, Equity Investment, Gain on Sale of Investment, Holding Gain on Equity Securities (in net income), Holding Loss on Equity Securities (in net income), Loss on Sale of investment, Unrealized Holding gain (in net income), or Unrealized holding loss (in net income))		0
	(Choice of Cash, Equity Income, Equity Investment, Gain on Sale of Investment, Holding Gain on Equity Securities (in net income), Holding Loss on Equity Securities (in net income), Loss on Sale of investment, Unrealized Holding gain (in net income), or Unrealized holding loss (in net income))	0
	(To record equity income.)
2.	(Choice of Cash, Equity Income, Equity Investment, Gain on Sale of Investment, Holding Gain on Equity Securities (in net income), Holding Loss on Equity Securities (in net income), Loss on Sale of investment, Unrealized Holding gain (in net income), or Unrealized holding loss (in net income))		0
	(Choice of Cash, Equity Income, Equity Investment, Gain on Sale of Investment, Holding Gain on Equity Securities (in net income), Holding Loss on Equity Securities (in net income), Loss on Sale of investment, Unrealized Holding gain (in net income), or Unrealized holding loss (in net income))	0
	(To record the receipt of dividends.)

b. At what amount is the Equity Investment reported on Competition's balance sheet on December 31?

Answer rating: 100% (QA)

a 1 Debit Equity Income 900 Credit Equity Investment 900 To record equ... View the full answer