Question

Tuecke Concrete acquired 20% of the outstanding common stock of Drew, Inc. on January 1,2012, by paying $1,100,000 for

40,000 shares. Drew declared and paid a $0.50 per share cash dividend on June 30 and again on December 31, 2012. Drew

reported a net income of $600,000 for the year. On December 31, 2012, the market price of Drew's common stock was $30 per share.

Instructions

(a) Prepare the journal entries for Tuecke's Concrete for 2012, assuming Tuecke cannot exercise significant influence over Drew.

(Use the cost method and assume Drew common stock should be classified as available-for-sale.)

(b) Prepare the journal entries for Tuecke's Concrete for 2012, assuming Tuecke can exercise significant influence over Drew.

(Use the equity method.)

(c) Indicate the balance sheet, and income statement account balances on December 31, 2012, under each method of accounting.

Answer 1

a)	Cost Method
Date	Account Titles and Explanations	Debit	Credit
1-Jan-12	Stock Investments	1,100,000.00
	Cash		1,100,000.00
30-Jun-12	Cash (40,000 shares x $.50)	20,000.00
	Dividend Revenue		20,000.00
31-Dec-12	Cash (40,000 shares x $.50)	20,000.00
	Dividend Revenue		20,000.00
31-Dec-12	Market Adjustment— Available-for-Sale	100,000.00
	Unrealized Gain or Loss— Equity		100,000.00
	[$1,100,000 – ($30 X 40,000)]
b)	Equity Method
1-Jan-12	Stock Investments	1,100,000.00
	Cash		1,100,000.00
30-Jun-12	Cash (40,000 shares x $.50)	20,000.00
	Stock investments		20,000.00
31-Dec-12	Cash (40,000 shares x $.50)	20,000.00
	Stock investments		20,000.00
31-Dec-12	Stock Investments (($600,000 X 20%)	$    120,000.00
	Revenue from Investment in Drew,Inc.		$  120,000.00
c)	Cost Method	Equity Method
Stock Investments
Common Stock	$                                                  1,200,000.00	$ 1,180,000.00
Unrealized Gain—Equity	$                                                     100,000.00
Dividend revenue	$                                                       40,000.00
Revenue from Investment in Drew,Inc.		$    120,000.00