Managerial Accounting

Accounting for equity investments
Suppose that on January 6, 2018, East Coast Motors paid $280,000,000 for its 35% investment in Boxcar Motors. East Coast has significant influence over Boxcar after the purchase. Assume Boxcar earned net income of 590,000,000 and paid cash dividends of $45,000,000 to all outstanding stockholders during 2018. (Assume all out standing stock is voting stock.)

 

Requirements

What method should East Cost Motors use to account for the investment in Boxcar Motors? Give your reasoning.

Journalize all required 2018 transactions related to East Cost Motors’s Boxcar investment. Include an explanation for each entry.

Post all 2018 transactions to the investment T-account. What is its balance after all the transactions are posted? How would this balance be classified on the balance sheet dated December 31, 2018?

Solution:

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