Crush Enterprises purchased 500,000 of the 1,000,000 outstanding shares of Carly Casualties for $4,500,000 on 1/1/16. On the date of the investment, Carly had net assets with a book value of $9,500,000 and fair value of $10,000,000. This difference is the result of equipment (remaining 10 year life) with a higher fair value than book value. Crush has significant influence over Carly and will

account for this investment using the equity method. During the year, Carly declared dividends of $125,000 and reported Net Income of $1,300,000. Prepare all necessary journal entries for Crush related to this investment. Then, calculate the ending balance in the Investment in Carly account.

What will be an ideal response?

Answer:
Investment
Investment in Carly 4,500,000
Cash 4,500,000

Share of Dividends
Cash 62,500
Investment in Carly 62,500
((500,000 / 1,000,000) × $125,000)

Share of Net Income
Investment in Carly 650,000
Income from Investment 650,000
((500,000 / 1,000,000) × $1,300,000)

Share of additional Depreciation Expense
Income from Investment 25,000
Investment in Carly 25,000
((9,500,000 - 9,000,000) / 10) = $50,000 × (500,000 / 1,000,000)

Ending Balance of Investment in Giant
$4,500,000 - $62,500 + $650,000 - 25,000 = $5,062,500