Question

Oliver Corporation has owned stock of Conrad Corporation since 2014. At December 31, 2017, its balances related to this investment were:

Equity Investments \(185,000

Fair Value Adjustment (AFS) 34,000 Dr.

Accumulated Unrealized Holding Gain or Loss—Income (recorded in Retained Earnings) 34,000 Cr.

On January 1, 2018, Oliver purchased additional stock of Conrad Company for \)475,000 and now has significant influence over Conrad. If the equity method had been used in 2014–2017, Oliver’s share of income would have been $33,000 greater than dividends received. Prepare Oliver’s journal entries to record the purchase of the investment and the change to the equity method.

Short answer

The equity method is used to record the income from investments, and the journal entries to change to the equity method are recorded below.

Step-by-step solution

Definition of equity method

The equity method is an accounting technique used to record the profits or income earned through their investment in the stocks of another company.

Journal Entry

Date	Particulars	Debit ($)	Credit ($)
1-1-2018	Equity Investment	508,000
	Cash		475,000
	Retained Earnings		33,000
	(Being investment purchased)
1-1-2018	Retained earnings	34,000
	Fair value adjustment		34,000
	(To eliminate fair value accounts)