1 Module 7: Intercorporate Investments. 2 Illustration - Equity Method Company P purchases 30% of the outstanding common stock of Company S on January.

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Presentation transcript:

1 Module 7: Intercorporate Investments

2 Illustration - Equity Method Company P purchases 30% of the outstanding common stock of Company S on January 2, 2009 for $400,000 cash. During 2009, Company S reported net income of $300,000 to its shareholders, and declared $100,000 dividends to its shareholders. Required: Prepare all journal entries necessary (on Company P’s books) to record this investment using the equity method of accounting.

3 Journal Entries on P’s Books: 1.Acquisition: 2.Dividends declared (100,000 x 30%) 3.Income reported (300,000 x 30%) Div. Receivable 30,000 L.T. Investment 30,000 L. T. Investment 90,000 Income from S 90,000 L.T. Investment400,000 Cash400,000

4 Comprehensive Problem Prepare the following journal entries for Jackson Company for Assume there were no other investments prior to the following activities. Feb Purchased 500 shares of Medical Company common stock for $20 per share (classified as trading securities): March 31 - Received a $1.20 per share dividend on Medical Company stock: Invest in Medical 10,000 Cash 10,000 Cash 600 Dividend Income 600

5 Comprehensive Problem April 1 - Purchased 30,000 of the 100,000 outstanding shares of Olde Company common stock at $10 per share. Classification of Investment? June 28 - Received a $1.00 share dividend on the Olde Company stock: Invest in Olde300,000 Cash 300,000 Cash30,000 Invest. in Olde 30,000 Equity investment

6 Comprehensive Problem Oct. 1 - Purchased 2,000 of Alpha Company common stock for $15 per share. These shares are classified as available-for-sale. Dec Olde Company reported annual earnings of $80,000 to its investors: Invest in Alpha 30,000 Cash 30,000 Invest. in Olde 24,000 Income from Olde 24,000 80,000 x.3

7 Comprehensive Problem Dec. 31 AJEs - At the end of the year, the following market prices per share were reported: Medical Co. (trading)$25 per share Alpha Co. (AFS)$12 per share Olde Co. (equity)$11 per share AJE for Medical? AJE for Alpha? AJE for Olde? Invest in Medical 2,500 Unrealized Gain (I/S) 2,500 Unrealized loss (SE) 6,000 Invest. in Alpha 6,000 $20 to $25 = $5 gain x 500 shares $15 to $12 = $3 loss x 2,000 shares NO! - equity method - no revaluation

8 Comprehensive Problem What total effect would the previous transactions have on the income statement for 2007? 3/31 Dividend income /31 Income from Olde + 24,000 12/31 Unrealized gain on Med. + 2,500 Total +27,100 What effect would the previous transactions have on other comprehensive income for 2007? 12/31 Unrealized loss on Alpha - 6,000