Question

A Boca Raton Company, Purchased $35,000 shares of common stock of Polo for (Long-Term) Investment $ 700,000 during the year for Polo Corp. Corp reported net income of $300,000 and paid $100,000 of dividends.

a.) assuming that $ 35,000 shares represent a 10% interest in the Polo Corp.

b.) Prepare what entries in Acct. that Boca Raton Company should make for it's in Investment Polo Stock that Year.

C.) What is the balance of stock accounts for Polo Investment on Polo Company's Books for that Year.

2. Assuming that the 35,000 Shares represent 20% of Interest in Polo Corp.

a.) Prepare the Journal Entry to reflect the entry in Polo stock.

b,) Prepare what entries in Acct. that Boca Raton Company should make for it's in Investment Polo Stock that Year.

c.) What is the balance of stock accounts for Polo Investment on Polo Company's Books for that Year.

Answer 1

1.a. As Boca Raton Company holds only 10 % of the shares of Polo, the cost method of accounting would be following for available for sale investments:

In the books of Boca Raton Company :

	Account Titles	Debit	Credit
		$	$
b.i.	Long Term Investments	700,000
	Cash		700,000
	To record investment in Polo Stock
ii.	Cash ( $ 100,000 x 10 % )	10,000
	Dividend Revenue		10,000
	To record receipt of dividends from Polo Stock.

c. In the books of Boca Raton, Polo Investments would be carried at $ 700,000.

2. As the investment by Boca Raton in Polo is 20%, and also assuming that it has significant influence on Polo, the equity method of accounting would be followed. Accordingly, its investment in Polo would be increased by share of income, and decreased by dividends received from Polo.

a. In the books of Boca Raton Company:

Transaction	Account Titles	Debit	Credit
		$	$
i.	Long Term Investments : Equity	700,000
	Cash		700,000
	To record cash paid for equity investment in Polo
ii.	Cash ( $ 100,000 x 20 % )	20,000
	Long Term Investments: Equity		20,000
	To record receipt of dividends from Polo
iii.	Long Term Investments: Equity ( $ 300,000 x 20 % )	60,000
	Investment Income		60,000
	To record share of income of Polo

c. Balance of Polo Investment = $ 700,000 - $ 20,000 + $ 60,000 = $ 740,000.