1. 1 Module 7: Intercorporate Investments

2. 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. 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. 4 Comprehensive Problem Prepare the following journal entries for Jackson Company for 2007. Assume there were no other investments prior to the following activities. Feb. 17 - 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. 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. 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. 31 - 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. 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. 8 Comprehensive Problem What total effect would the previous transactions have on the income statement for 2007? 3/31 Dividend income + 600 12/31 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