Question

An abbreviated balance sheet for Courant Corporation disclosed the following as of Jan. 1,20x5: Current assets $100 (market value also $100) Equipment 500 (market value $1,000, 5 years of useful life remaining) Land 1,000 (market value $3,000) Total assets 1,600 Liabilities 400 (market value also $400) Owners Equity 1,200 Total Liabilities +Owners' Equity 1,600 D Corporation purchased 40% of Courant's common stock for $1,800, on Jan. 1,20x5. Courant earned net income of $1,000 in 20x5, and paid $600 in dividends for 20x5. Required: Prepare the journal entries that D Corporation should make during the year pertaining to the Investment in Courant including its initial investment in Courant. Show your work. BE SURE AND WRITE THE ACCOUNT NAME AND DR FOR DEBIT OR CR FOR CREDIT BY IT. HTML Editor

Answer 1

Answer:

D Corporation purchased 40% of Courant's common stock, so the method of accounting we will use is the "Equity Method of Accounting".

When one company has an interest in any other company it has equity in that company. This method is used when one company own between 20 to 50 percent of another's company voting stock or when other company reports profit or loss and when it pays a dividend. Because of the close relationship with two companies, the acquired company profit and loss affect the financial statement of other company.

Now the Journal Entries in the Books of D corporation :

1. D corporation purchased 40 % Courant's common stock for $ 1800:

Here, Initial purchase of other's company stock will increase our investment account and decrease the cash account on Balance sheet.The entry will be:

S.no.	Particulars	DR (in $)	CR (in $)
1.	Investment in Associates OR Investment A/c DR	1800
	To Cash		1800

2. Courant earned net income $ 1000.

As D corporation has made investment in Courant than his share of profit will increase his income statement. The entry will be:

S.no	Particulars	DR (in $)	CR (in $)
2.	Investment in Associates OR Investment A/c DR	1000
	To Investment Income OR Investment Revenue A/c		1000

3. Paid dividend $ 600

When the acquired company pays dividend, the equity method consider this is a return of the investment rather than income. So, for D corporation it's not the income it's return on the investment. The entry will be:

S.no.	Particulars	DR (in $)	CR (in $)
3	Cash A/c DR	600
	To Investment in Associates OR Investment Account		600

* Two accounts are mentioned in solution , its our choice we can use anyone of them.