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Accounting

27th Edition
WARREN + 5 others
ISBN: 9781337272094

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BuyFindarrow_forward

Accounting

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

Equity method

On January 2, Yorkshire Company acquired 40% of the outstanding stock of Fain Company for $600,000. For the year ended December 31. Fain Company earned income of $140,000 and paid dividends of $50,000. Prepare the entries for Yorkshire Company for the purchase of the stock, the share of Fain income, and the dividends received from Fain 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 Y, under the equity method

Explanation

Prepare journal entry for the purchase of 40% of outstanding stock of Company F at $600,000.

Date Account Titles and Explanations Post. Ref. Debit ($) Credit ($)
January 1 Investment in Company F   600,000  
             Cash     600,000
    (To record purchase of shares of Company F for cash)      

Table (1)

Explanation:

  • Investment in Company F 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 F.

Date Account Titles and Explanations Post. Ref. Debit ($) Credit ($)
December 31 Investment in Company S   56,000  
             Income of Company S     56,000
    (To record income realized from Company F)      

Table (2)

Explanation:

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

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