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Intermediate Accounting: Reporting...

3rd Edition
James M. Wahlen + 2 others
ISBN: 9781337788281

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BuyFindarrow_forward

Intermediate Accounting: Reporting...

3rd Edition
James M. Wahlen + 2 others
ISBN: 9781337788281
Textbook Problem
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On January 1, 2019, Tiger Company purchased 6,720 shares of Eagle Corporation’s common stock when Eagle had 22,400 shares outstanding. On that date, the following information pertained to Eagle:

Chapter 13, Problem 14RE, On January 1, 2019, Tiger Company purchased 6,720 shares of Eagle Corporations common stock when

During 2019, Eagle earned net income of $120,000 and paid total dividends of $48,000. Prepare the journal entries of Tiger related to its share of Eagle’s net income and dividends in 2019.

To determine

Record the journal entries in the books of Company T related to its share of Corporation E’s net income and dividends in 2019.

Explanation

Investment: It refers to the process of using the currently held excess cash to earn profitable returns in future. The investments can be made in equity securities such as shares or debt securities such as bonds.

Record the journal entries in the books of Company T related to its share of Corporation E’s net income and dividends in 2019.

DateAccount title and explanationDebit ($)Credit ($)
 Investment in stock: Corporation E (1)36,000 
 Investment income 36,000
 (To record the share of net income)  
    
 Investment income750 
 Investment in stock: Corporation E (2) 750
 (To record the fair value adjustment)  
    
 Cash (3)14,400 
 Investment in stock: Corporation E 14,400
 (To record the share of dividends)  

Table (1)

Working note (1):

Calculate the amount of investment income:

Investment income=(Net income×[Number of sharesShares outstanding])=($120,000×6,720 shares22,400 outstanding shares)=($120,000×0.30)=$36,000

  • Investment in stock is an asset account and it is increased. Thus, debit investment in stock with $36,000.
  • Investment income is revenue and it increases the value of shareholder’s equity. Thus, credit investment income with $36,000

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