Exam 1: The Equity Method of Accounting for Investments

On January 4, 2021, Mason Co. purchased 40,000 shares (40%) of the common stock of Hefly Corp., paying $560,000. At that time, the book value and fair value of Hefly's net assets was $1,400,000. The investment gave Mason the ability to exercise significant influence over the operations of Hefly. During 2021, Hefly reported income of $150,000 and paid dividends of $40,000. On January 2, 2022, Mason sold 10,000 shares for $150,000.What is the balance in the investment account after the sale of the 10,000 shares?

Borgin Inc. owns 30% of the outstanding voting common stock of Burkes Co. and has the ability to significantly influence the investee's operations and decision-making. On January 1, 2021, the balance in the Investment in Burkes Co. account was $402,000. Amortization associated with the purchase of this investment is $8,000 per year. During 2021, Burkes earned income of $108,000 and paid cash dividends of $36,000. Previously in 2020, Burkes had sold inventory costing $28,800 to Borgin for $48,000. All but 25% of this merchandise was consumed by Borgin during 2020. The remainder was used during the first few weeks of 2021. Additional sales were made to Borgin in 2021; inventory costing $33,600 was transferred at a price of $60,000. Of this total, 40% was not consumed until 2022.What amount of equity income would Borgin have recognized in 2021 from its ownership interest in Burkes?

On January 2, 2021, Jolley Corp. paid $250,000 for 25% of the voting common stock of Wonder Co. On that date, the book value of Wonder was $850,000. A building with a carrying value of $160,000 was actually worth $220,000. The building had a remaining life of twenty years. Wonder owned a trademark valued at $90,000 over cost that was to be amortized over 20 years.During 2021, Wonder sold to Jolley inventory costing $60,000, at a markup of 50% on cost. At the end of the year, Jolley still owned some of these goods with an intra-entity selling price of $33,000. Jolly uses a perpetual inventory system.Wonder reported net income of $200,000 during 2021. This amount included a gain of $35,000. Wonder paid dividends totaling $40,000.Required:Prepare all of Jolley's journal entries for 2021 in relation to Wonder Co. Assume the equity method is appropriate for use.