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Equity method On January 2, Peyroux Company acquired 35 % of the outstanding stock of Gruden Company for $625,000. For the year ended December 31, Gruden Company earned income of $110,000 and paid dividends of $26,000. Prepare the entries for Peyroux Company for the purchase of the stock, the share of Gruden income, and the dividends received from Gruden Company.

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Accounting (Text Only)

26th Edition
Carl Warren + 2 others
Publisher: Cengage Learning
ISBN: 9781285743615

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BuyFindarrow_forward

Accounting (Text Only)

26th Edition
Carl Warren + 2 others
Publisher: Cengage Learning
ISBN: 9781285743615
Chapter 15, Problem 15.3APE
Textbook Problem
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Equity method

On January 2, Peyroux Company acquired 35 % of the outstanding stock of Gruden Company for $625,000. For the year ended December 31, Gruden Company earned income of $110,000 and paid dividends of $26,000. Prepare the entries for Peyroux Company for the purchase of the stock, the share of Gruden income, and the dividends received from Gruden 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 P, under the equity method

Explanation of Solution

Prepare journal entry for the purchase of 35% of outstanding stock of Company G at $625,000.

Date Account Titles and Explanations Post. Ref. Debit ($) Credit ($)
January 2 Investment in Company G   625,000  
             Cash     625,000
    (To record purchase of shares of Company G for cash)      

Table (1)

  • in Company G 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 G.

Date Account Titles and Explanations Post. Ref. Debit ($) Credit ($)
December 31 Investment in Company G   38,500  
             Income of Company G     38,500
    (To record income realized from Company G)      

Table (2)

  • Investment in Company G is an asset account. Since stock investments are purchased, asset value increased, and an increase in asset is debited.
  • Income of Company G 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 G...

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Chapter 15 Solutions

Accounting (Text Only)
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