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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.

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Financial Accounting

15th Edition
Carl Warren + 2 others
Publisher: Cengage Learning
ISBN: 9781337272124

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BuyFindarrow_forward

Financial Accounting

15th Edition
Carl Warren + 2 others
Publisher: Cengage Learning
ISBN: 9781337272124
Chapter 15, Problem 3PEA
Textbook Problem
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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

Journalize the stock investment transactions for Company C, under the equity method.

Explanation of Solution

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.

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

DateAccount Titles and ExplanationsPost. Ref.Debit ($)Credit ($)
January2Investment in Company S 500,000 
           Cash  500,000
  (To record purchase of shares of Company S for cash)   

Table (1)

  • 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.

DateAccount Titles and ExplanationsPost. Ref.Debit ($)Credit ($)
December31Investment in Company S 32,000 
           Income of Company S  32,000
  (To record income realized from Company S)   

Table (2)

  • Investment in Company S is an asset account...

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Chapter 15 Solutions

Financial Accounting
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