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Prince corporation purchased 20 percent ownership of snow company on January 1, 2015, for $54,000 and...

Prince corporation purchased 20 percent ownership of snow company on January 1, 2015, for $54,000 and paid cash. on that date, the book value of steams reported net assets was equal to the fair value of steams net assets. if prince uses the cost method to account for their investment in snow. net income and dividend payments of snow were 10,000 and 5,000 in 2015, and 20,000 and 22,000 in 2016. (SHOW WORK)

Required: Prepare the journal entries that would be recorded by prince in 2015 and 2016.

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Answer #1

As per GAAP there are three method of investment valuation , 1) Cost method ,2) Equity and 3) Consildation

Cost method may used by Investor Company when there holding is upto or less than 20% and the Investor Company has no substantial influence over the Investee company .

Under cost method , Investment purchase are shown at historical , ie purchased value in the Balancesheet of Investor. And any income , dividend income receive by the company are recorded as the dividend income and are taxed accordingly . Dividend income upto the % of ownership will be recognised. Under cost method Income of Snow in % of Prince holding will not be added to Investment value .

Entry for Dividend income of Prince Corporation in his book .

Debit Credit
Jan 1 2015 Investment in Snow Company $54000
Cash $54000
(Being Investment made in Snow Company)
2015 Cash $1000
Dividend Income (5000×20%) $1000
(Being Dividend income from Investment in Snow)
2016 Cash $4400
Dividend Income (22000×20%) $4400
(Being Dividend income receive from Investment in Snow company )
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