Saxton Corporation purchased 25 percent of Taylor Company's voting stock on January 1, 2013, for $18 million in cash. At the date of acquisition, Taylor reported its total assets at $360 million and its total liabilities at $336 million. Investigation revealed that Taylor's plant and equipment (15-year life) was overvalued by $10.8 million and it had an unreported customer database (2-year life) valued at $3 million. Taylor declares and pays $600,000 in dividends and reports net income of $1,500,000 in 2016. Required Prepare the necessary journal entries on Saxton's books to report the above information for 2016 assuming Saxton uses the equity method to report its investment.

According to the question, calculation of the given data are as follows,

Equity of Taylor = Saxton's share of Taylor's  -  Adjustment in revaluation

By putting the value, we get

= [($1,500,000 25%) - (($10,800,000 15) 25%)]

= $375000 - $180000

= $195,000

Journal Entry for the given calculation are as follows,

Cash  A/c Dr.         $150,000    [working = $600,000 25%]

To,  Taylor investment A/c  $150,000

(Receipts of dividends is being recorded)

Taylor Investment A/c Dr.     $195,000

To, Taylor net income equity A/c    $195,000

( Invester earning is being recorded)

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Answer and Explanation:

The Journal entry is shown below:-

a. Cash Dr, $150,000 ($600,000 × 25%)

To Investment in Taylor $150,000

(Being receipts of dividends is recorded)

b. Investment in Taylor $195,000

Equity in net income of Taylor $195,000

(Being earning of the investee is recorded)

Working note:-

Equity in net income of Taylor = Santon's share of Taylor's reported income - Revaluation adjustment

= ($1,500,000 × 25%) - ($10,800,000 ÷ 15 × 25%)

= $375,000 - $180,000

= $195,000