Question

Question No. 3 :

Alpha Company purchases 20 percent of Beta Company for $250,000 in cash. Alpha can exercise significant influence over the investee; thus, the equity method is appropriately applied. The acquisition is made on January 1, 2018. During 2018, Beta reports a net income of $187,500 and at year-end declares and pays a cash dividend of $75,000. Amortization associated with the purchase of this investment is $8,000 per year.

Required:

Prepare the journal entries for 2018 in the records of Alpha Company

Answer 1

Please find below answer :

Journal Entry	In the books of Alpha Company
Year	Particulars	Debit ($)	Credit ($)
January 1 2008	Equity Investment	$        250,000
	Cash		$          250,000
	(Being equity investment being made in Beta company)
December 1 2008	Equity Investment	$          37,500
	Income from equity investment		$            37,500
	( Being income booked on account of annual income from Beta company)
Note 1	Net income = 187500
	Alpha Share 20%
	Income = 187500*20% = 37500
December 1 2008	Cash	$          15,000
	Equity Investment		$            15,000
	( Being dividend from Beta recorded in books)
	Net income = 75000
	Alpha Share 20%
	Income = 75000*20% = 37500
December 1 2008	Income from equity investment	$             8,000
	Equity Investment		$              8,000
	( Being amortization entry passed in the books)