Quahog purchased 15% of Clam on January 1, 2021 for $340,000 in cash and did not have

Fantastic news! We've Found the answer you've been seeking!

Question:

Quahog purchased 15% of Clam on January 1, 2021 for $340,000 in cash and did not have the ability to exercise significant influence. The price was 15% of Clam’s book value. During 2021, Clam reported income of $500,000 and paid a dividend of $20,000. On December 31, 2021, the market value of Quahog’s investment in Clam was $320,000. Then, on January 1, 2022, Quahog purchased an additional 20% of Clam for $500,000 in cash and was able to have significant influence. Quahog had been using the fair value method.

a. Journalize all necessary entries on the books of Quahog using the fair value method in 2021, including the initial purchase.

b. Journalize the conversion to the equity method in 2022.