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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

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How should a debt callable by the creditor be reported in the debtor鈥檚 financial statements?

Within the current liabilities section, how do you believe the accounts be listed? Defend your position.

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EXCEL (Equity Securities Entries and Disclosures) Parnevik Company has the following securities in its

investment portfolio on December 31, 2017 (all securities were purchased in 2017): (1) 3,000 shares of Anderson Co. common

stock which cost \(58,500, (2) 10,000 shares of Munter Ltd. common stock which cost \)580,000, and (3) 6,000 shares of King Company

preferred stock which cost \(255,000. The Fair Value Adjustment account shows a credit of \)10,100 at the end of 2017.

In 2018, Parnevik completed the following securities transactions.

1. On January 15, sold 3,000 shares of Anderson鈥檚 common stock at \(22 per share less fees of \)2,150.

2. On April 17, purchased 1,000 shares of Castle鈥檚 common stock at \(33.50 per share plus fees of \)1,980.

On December 31, 2018, the market prices per share of these securities were Munter \(61, King \)40, and Castle $29. In addition, the

accounting supervisor of Parnevik told you that, even though all these securities have readily determinable fair values, Parnevik

will not actively trade these securities because the top management intends to hold them for more than one year.

Instructions

(a) Prepare the entry for the security sale on January 15, 2018.

(b) Prepare the journal entry to record the security purchase on April 17, 2018.

(c) Compute the unrealized gains or losses and prepare the adjusting entry for Parnevik on December 31, 2018.

(d) How should the unrealized gains or losses be reported on Parnevik鈥檚 income statement and balance sheet?
See all solutions

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