On January 3, 2016, Martin Company purchased for \(500,000 cash a 10% interest in Renner Corp. On that date, the net assets of Renner had a book value of \)3,700,000. The excess of cost over the underlying equity in net assets is attributable to undervalued depreciable assets having a remaining life of 10 years from the date of Martin’s purchase.

The fair value of Martin’s investment in Renner securities is as follows: December 31, 2016, \(560,000, and December 31, 2017, \)515,000. On January 2, 2018, Martin purchased an additional 30% of Renner’s stock for \(1,545,000 cash when the book value of Renner’s net assets was \)4,150,000. The excess was attributable to depreciable assets having a remaining life of 8 years. During 2016, 2017, and 2018, the following occurred.

Renner Dividends Paid by

Net Income Renner to Martin

2016 \(350,000 \)15,000

2017 450,000 20,000

2018 550,000 70,000

Instructions On the books of Martin Company,

prepare all journal entries in 2016, 2017, and 2018 that relate to its investment in Renner Corp., reflecting the data above and a change from the fair value method to the equity method.

Date

Particulars

Debit ($)

Credit ($)

03/01/2016

Equity Investments

500,000

Cash

500,000

(Being investment purchased)

31/12/2016

Cash

15,000

Dividend Revenue

15,000

(Being Dividend Revenue Recorded)

31/12/2016

Fair value adjustment

60,000

Unrealized Holding Gain or loss- Income

60,000

(Being increase in the value of investment recorded)

Date

Particulars

Debit ($)

Credit ($)

31/12/2017

Cash

20,000

Dividend Revenue

20,000

(Being Dividend Revenue Recorded)

31/12/2017

Unrealized Holding Gain or Loss- Loss

45,000

Fair value adjustment

45,000

(Being a Decrease in the value of investment recorded)

2016

2017

Total

Equity earnings (10%)

35,000

45,000

80,000

Dividend received

-15,000

-20,000

-35,000

Retrospective application

20,000

25,000

45,000

Date

Particulars

Debit ($)

Credit ($)

02/01/2018

Equity Investment (Renner)

1,590,000

Cash

1,545,000

Retained Earnings

45,000

(Purchase of investment)

500,000

02/01/2018

Equity Investment (Renner)

500,000

Equity Investment

(Being reclassification of investment into equity method)

02/01/2018

Retained Earnings

15,000

Fair Value Adjustment

15,000

(Being Elimination of fair value accounts)

31/12/2018

Equity Investment (Renne)

220,000

220,000

Investment Revenue (550,000*40%)

(Being income recorded)

31/12/2018

Cash

70,000

Equity Investment (Renne)

70,000

(Being cash dividend received recorded)