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AccountingIntermediate Accounting: Reporting And Analysis3rd Edition

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Chapter 13, Problem 18E
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Intermediate Accounting: Reporting...

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

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Intermediate Accounting: Reporting...

3rd Edition
James M. Wahlen + 2 others
ISBN: 9781337788281
Textbook Problem
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Equity Method Miller Corporation acquired 30% of the outstanding common stock of Crowell Corporation for $160,000 on January 1, 2019, and obtained significant influence. The purchase price of the shares was equal to their book value. During 2019, the following information is available for Crowell:

Chapter 13, Problem 18E, Equity Method Miller Corporation acquired 30% of the outstanding common stock of Crowell Corporation

Required:

  1. 1. Prepare journal entries for Miller to reflect the preceding information.
  2. 2. What is the balance in Miller’s investment account on December 31, 2019? Show your computations.

1.

To determine

Record the journal entries in the books of Corporation M.

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.

Equity method: Equity method is the method used for accounting equity investments which claim a significant influence of above 20% but less than 50% in the outstanding stock of the investee company.

Record the purchase of Corporation C’s 30% outstanding common stock:

DateAccount Title and Explanation Debit Credit 
January 1, 2019Investment in Stock: Corporation C$160,000 
         Cash $160,000
 (To record the purchase of 30% shares of Corporation C)  

Table (1)

  • Investment in stock: Corporation C is an asset account and it is increased. Thus, investment in stock is debited with $160,000.
  • Cash is an asset account and it is decreased. Thus, cash account is credited with $160,000.

Record the receipt of dividend.

DateAccount Title and Explanation Debit Credit 
March 31, 2019Cash ($50,000×30%)$15,000 
 Investment in Stock: Corporation C $15,000
 (To record the receipt of cash dividend)  

Table (2)

  • Cash is an asset account and it is increased. Thus, cash account is debited with $15,000.
  • Investment in stock: Corporation C is an asset account and it is decreased. Thus, investment in stock is credited with $15,000.

Record the income from investment.

DateAccount Title and Explanation Debit Credit 
June 30, 2019Investment in Stock: Corporation C$36,000 
 Investment income ($120,000×30%) $36,000
 (To record the income earned from investment)  

Table (3)

  • Investment in stock: Corporation C is an asset account and it is increased

2.

To determine

Compute the balance in the Corporation M’s investment account on December 31, 2019.

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