Question

Visage Cosmetics, a public company, acquires 40% of Sage Hill Inc.’s 26,900 common shares for $19 per share on January 2, 2021. On June 15, Sage Hill pays a cash dividend of $26,900. On December 31, Sage Hill reports profit of $375,500 for the year. At December 31, Sage Hill shares are trading at $22 per share. Prepare the required journal entries to record the Sage Hill Inc. investment assuming significant influence exists. (Credit account titles are automatically indented when the amount is entered. Do not indent manually. If no entry is required, select "No Entry" for the account titles and enter 0 for the amounts. Record journal entries in the order presented in the problem.) Date Account Titles and Explanation Debit Credit choose a transaction date select an account title to record purchase of investment enter a debit amount enter a credit amount select an account title to record purchase of investment enter a debit amount enter a credit amount (To record purchase of investment.) choose a transaction date select an account title to record collection of dividend from associate enter a debit amount enter a credit amount select an account title to record collection of dividend from associate enter a debit amount enter a credit amount (To record collection of dividend from associate.)

Answer 1

Visage Cosmetics has acquired 40% stake in Sage Hill with significant influence. So, we use equity method of accounting for investments. Equity method is used when investment in associate is between 20 to 50% and investor exerts significant influence over associate. Under this method, the investment is treated as asset for investor and value of asset increases with share of investor in the income generated by associate. Similarly, value decreases when associate incurs losses and pays cash dividend (because dividend is received in cash).

Number of shares acquired = 40% * 26900

= 10,760 shares

Value of investment = 10,760 shares * $19 per share

= $204,440

Total cash dividend declared on June 15= $26,900 on 26,900 shares

                          = $1 per share

Cash dividend received by Visage = $1 * 10,760 shares

= $10,760

Cash dividend received by investor reduces the value of investment since it represents portion of earnings which have been distributed by associate. Since investor also has equity holding in associate, it represents proportionate earnings of investor distributed.

Total profits declared on Dec. 31 = $375,500

Visage’s share = 40% * $375,500

= $150,200

Investment value increases by investor’s portion of net profits.

Further, no entry is required for change in share price of Sage Hill on Dec. 31 as under equity method, investment in associate is shown at “carrying value”,i.e., original investment cost + share of profit – cash dividend – share of loss, and not revalued at year-end according to market price.

	Journal entries in the books of Visage Cosmetics
Date	Particulars	Debit amount	Credit amount
Jan. 2,2021	Investment in associate	$204,440
	Cash		$204,440
	(To record purchase of investment)
Jun. 15,2021	Cash	$10,760
	Investment in associate		$10,760
	(Being cash dividend received)
Dec. 31,2021	Investment in associate	$150,200
	Equity income from investment in associate		$150,200
	(Being share in income generated by associate)
Dec. 31, 2021	No entry for change in market price of shares of Sage Hill