On January 1, 2016, Big Company spent $350,000 for a 20 percent interest in Little Company. There is no difference between the purchase price and the book value of the net assets acquired. Little reports net income of $300,000 and pays dividends $100,000. The fair value of Big’s investment in Little as determined by the market is $295,000.
REQUIRED: In your opinion, how should Big account for the investment? Why? Are there any other alternative ways to account for the investment? Based on your opinion, prepare the journal entries that Big would record for this investment. Show your work, i.e. what numbers were added, subtracted, multiplied or divided to arrive at your solution. Partial credit is given for responses to this question IF supporting calculations are provided. NO points are given if work is not provided.