Matrix, Inc acquired 25% of Neo Enterprises for $2,000,000 on January 1, 2011. The fair value and book value of 25% of Neo's identifiable net assets was $2,000,000 and $1,600,000 on that date, and the difference was attributable to assets that would be depreciated over 10 years. During 2011 Neo recognized net income of $500,000 and paid dividends of $400,000. Neo had a total fair value of $10,000,000 as of December 31, 2011.
Required: Prepare the journal entries necessary to account for the Neo investment, assuming that Fredo accounts for that investment as an equity method investment, and elects the fair-value option.