Question

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.

Short answer

All the journal entries for the years 2016, 2017, and 2018 are passed in steps 1, 2, and 3.

Step-by-step solution

Journal Entries for 2016

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)

Step 2:Journal Entries for 2017

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)

Journal Entries for 2018

	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)