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Chapter 13: Q17E (page 658)

(Equity Method) On January 1, 2017, Pennington Corporation purchased 30% of the common shares of Edwards

Company for \(180,000. During the year, Edwards earned a net income of \)80,000 and paid dividends of $20,000.

Instructions

Prepare the entries for Pennington to record the purchase and any additional entries related to this investment in Edwards Company

in 2017.

Short Answer

Expert verified

Equity investment is debited by $180,000 and cash credited by $180,000. Cash debited by $6,000 and dividend revenue credited by $6,000. Equity investment debited by $24,000 and revenue from investment credited by $24,000.

Step by step solution

01

Definition of equity method

According to this method Income from investment is calculated according to the net income of the company.

02

Journal entries regarding equity investment

Date

Particulars

Debit

Credit

January 1, 2017

Equity Investment

$180,000

Cash

$180,000

(Entry for the purchase of outstanding common stock)

December 31, 2017

Cash ($20,000 * 30%)

$6,000

Dividend Revenue

6,000

(Entry of dividend received on shares)

December 31, 2018

Equity Investment ($80,000 * 30%)

$24,000

Revenue from Investment

$24,000

(Entry for the recording of income from investment)

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Most popular questions from this chapter

Question: Explain how trading debt securities are accounted for and reported?

Journal Entries for Fair Value and Equity Methods) The following are two independent situations.

Situation 1: Conchita Cosmetics acquired 10% of the 200,000 shares of common stock of Martinez Fashion at a total cost of \(13 per

share on March 18, 2017. On June 30, Martinez declared and paid \)75,000 cash dividends to all stockholders. On December 31,

Martinez reported net income of \(122,000 for the year. At December 31, the market price of Martinez Fashion was \)15 per share.

Situation 2: Monica, Inc. obtained significant influence over Seles Corporation by buying 30% of Seles鈥檚 30,000 outstanding shares

of common stock at a total cost of \(9 per share on January 1, 2017. On June 15, Seles declared and paid cash dividends of \)36,000

to all stockholders. On December 31, Seles reported a net income of $85,000 for the year.

Instructions

Prepare all necessary journal entries in 2017 for both situations.

Mayaguez Corporation provides its officers with bonuses based on net income. For 2017, the bonuses total $350,000 and are paid on February 15, 2018. Prepare Mayaguez鈥檚 December 31, 2017, adjusting entry and the February 15,2018, entry.

Question: At what amount should trading, available-for-sale, and held-to-maturity debt securities be reported on the balance sheet?

(Ratio Computations and Effect of Transactions) Presented below is information related to Carver Inc.

CARVER INC. BALANCE SHEET DECEMBER 31, 2017

Amount \(

Amount \)

Amount \(

Cash

\)45,000

Note payable (short-term)

\(50,000

Receivables

\)110,000

Account payable

32,000

Less: Allowance

15,000

95,000

Accrued liabilities

5,000

Inventory

170,000

Common stock (par \(5)

260,000

Prepaid insurance

8,000

Retained earnings

141,000

Land

20,000

Equipment net

150,000

\)488,000

\(488,000

CARVER INC.

INCOME STATEMENT

FOR THE YEAR ENDED DECEMBER 31, 2017

Sales revenue

\)1,400,000

Cost of goods sold

Inventory Jan 1, 2017

\(200,000

Purchases

790,000

Cost of goods available for sale

990,000

Inventory Dec 31, 2017

(170,000)

Cost of goods sold

(820,000)

Gross profit on sales

580,000

Operating expenses

(170,000)

Net income

\)410,000

Instructions

(a) Compute the following ratios or relationships of Carver Inc. Assume that the ending account balances are representative unless the information provided indicates differently.

(1) Current ratio.

(2) Inventory turnover.

(3) Accounts receivable turnover.

(4) Earnings per share.

(5) Profit margin on sales.

(6) Return on assets on December 31, 2017.

(b) Indicate for each of the following transactions whether the transaction would improve, weaken, or have no effect on the current ratio of Carver Inc. at December 31, 2017.

(1) Write off an uncollectible account receivable, \(2,200.

(2) Purchase additional capital stock for cash.

(3) Pay \)40,000 on notes payable (short-term).

(4) Collect $23,000 on accounts receivable.

(5) Buy equipment on account.

(6) Give an existing creditor a short-term note in settlement of account.
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