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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

Briefly describe some of the similarities and differences between GAAP and IFRS with respect to the accounting for

investments.

Question:Adriana Co., with annual net sales of $5 million, maintains a markup of 25% based on cost. Adriana’s expenses average 15% of net sales. What is Adriana’s gross profit and net profit in dollars?

Leon Wight, a newly hired loan analyst, is examining the current liabilities of a corporate loan applicant. He observes that unearned revenues have declined in the current year compared to the prior year. Is this a positive indicator about the client’s liquidity? Explain.

(Multiple-Step and Single-Step Statements) Two accountants for the firm of Elwes and Wright are arguing about the merits of presenting an income statement in a multiple-step versus a single-step format. The discussion involves the following 2017 information related to P. Bride Company (\(000 omitted).

Administrative expense

Officers’ salaries \)4,900

Depreciation of office furniture and equipment \(3,960

Cost of goods sold \)60,570

Rent revenue \(17,230

Selling expense

Delivery expense \)2,690

Sales commissions \(7,980

Depreciation of sales equipment \)6,480

Sales revenue \(96,500

Income tax \)9,070

Interest expense $1,860

Instructions

  1. Prepare an income statement for the year 2017 using the multiple-step form. Common shares outstanding for 2017 total 40,550 (000 omitted).
  2. Prepare an income statement for the year 2017 using the single-step form.
  3. Which one do you prefer? Discuss.

In determining the amount of a provision, a company using IFRS should generally measure:

(a) Using the midpoint of the range between the lowest possible loss and the highest possible loss.

(b) Using the minimum amount of the loss in the range.

(c) Using the best estimate of the amount of the loss expected to occur.

(d) Using the maximum amount of the loss in the range.
See all solutions

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