Question
In: Accounting
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
Solutions
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
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