BuyFindarrow_forward

Accounting

27th Edition
WARREN + 5 others
ISBN: 9781337272094

Solutions

Chapter
Section
BuyFindarrow_forward

Accounting

27th Edition
WARREN + 5 others
ISBN: 9781337272094
Textbook Problem

Equity method

On January 2, Cohan Company acquired 40% of the outstanding stock of Sanger Company for $500,000. For the year ended December 31, Sanger Company earned income of $80,000 and paid dividends of $30,000. Prepare the entries for Cohan Company for the purchase of the stock, the share of Sanger income, and the dividends received from Sanger Company.

To determine

Equity investments: Equity investments are stock instruments which claim ownership in the investee company and pay a dividend revenue to the investor company.

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.

Journal entry: Journal entry is a set of economic events which can be measured in monetary terms. These are recorded chronologically and systematically.

Debit and credit rules:

  • Debit an increase in asset account, increase in expense account, decrease in liability account, and decrease in stockholders’ equity accounts.
  • Credit decrease in asset account, increase in revenue account, increase in liability account, and increase in stockholders’ equity accounts.

To journalize: The stock investment transactions for Company C, under the equity method

Explanation

Prepare journal entry for the purchase of 40% of outstanding stock of Company S at $500,000.

Date Account Titles and Explanations Post. Ref. Debit ($) Credit ($)
January 2 Investment in Company S   500,000  
             Cash     500,000
    (To record purchase of shares of Company S for cash)      

Table (1)

Explanation:

  • Investment in Company S is an asset account. Since stock investments are purchased, asset value increased, and an increase in asset is debited.
  • Cash is an asset account. Since cash is paid, asset account decreased, and a decrease in asset is credited.

Prepare journal entry for share of income received from Company S.

Date Account Titles and Explanations Post. Ref. Debit ($) Credit ($)
December 31 Investment in Company S   32,000  
             Income of Company S     32,000
    (To record income realized from Company S)      

Table (2)

Explanation:

  • Investment in Company S is an asset account. Since stock investments are purchased, asset value increased, and an increase in asset is debited.
  • Income of Company S is a revenue account. Revenues increase stockholders’ equity value, and an increase in stockholders’ equity is credited.

Working Notes:

Compute amount of income received from Company S...

Still sussing out bartleby?

Check out a sample textbook solution.

See a sample solution

The Solution to Your Study Problems

Bartleby provides explanations to thousands of textbook problems written by our experts, many with advanced degrees!

Get Started

Additional Business Solutions

Find more solutions based on key concepts

Show solutions add

How are inflation and unemployment related in the short run?

Principles of Economics (MindTap Course List)

If a stock is not in equilibrium, explain how financial markets adjust to bring it into equilibrium.

Fundamentals of Financial Management, Concise Edition (MindTap Course List)

Classify consumer products

MKTG 12:STUDENT ED.-TEXT

When is a stock said to be in equilibrium? Why might a stock at any point in time not be in equilibrium?

Fundamentals of Financial Management, Concise Edition (with Thomson ONE - Business School Edition, 1 term (6 months) Printed Access Card) (MindTap Course List)