Question

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SALMAN Company acquires 60 percent of HAMAD Company’s common stock for $200,000 at the beginning of the year and gains significant influence over HAMAD.

SALMAN Company acquires 60 percent of HAMAD Company’s common stock for $200,000 at the beginning of the year and gains significant influence over HAMAD. During the year, HAMAD has net income of $40,000 and pays dividends of $30,000.

Required: prepare the journal entries in books of SALMAN company under the Equity and Cost Method

Expert Solution

Journal entries under Equity method

In equity method, investment value will be changed on the basis of net income/loss earned/incurred and dividend paid by the investee. Any income received by the investor will be recorded as revenue seperately.

1) Investment in HAMAD company a/c Dr. $2,00,000

To Cash/Bank a/c $2,00,000

2) Under equity method, book value of the investment will increase or decrease by the share in earning/losses of reported by the investee

Share in Net income = $40,000 * 60% = $24,000

Investment in HAMAD company a/c Dr. $ 24,000

To Equity income in HAMAD a/c $24,000

3) When dividend will receive, book value of investment will be reduced by the dividend received

Share in dividend = $30,000 * 60% = $18,000

Cash a/c Dr $18,000

To Investment in HAMAD company a/c $18,000

Journal entries under Cost method

In cost method, investment value will not be changed. Any income received by the investor will be recorded as revenue seperately.

1) Investment in HAMAD company a/c Dr. $2,00,000

To Cash/Bank a/c $2,00,000

2) Cash a/c Dr $18,000

To Dividend income a/c $18,000

ekkarill92 answered 2 years ago

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