Prepare entries under cost and equity methods, and prepare a memorandum. PH.4 (LO 2) Writing Wellman...

Prepare entries under cost and equity methods, and prepare a memorandum.

PH.4 (LO 2) Writing Wellman Company acquired 30% of the outstanding common stock of Grinwold Inc. on January 1, 2022, by paying $1,800,000 for 60,000 shares. Grinwold declared and paid a $0.50 per share cash dividend on June 30 and again on December 31, 2022. Grinwold reported a net income of $800,000 for the year.

a. Total dividend revenue for 2022 $60,000
b. Revenue from stock investments $240,000

Instructions

a. Prepare the journal entries for Wellman Company for 2022, assuming Wellman cannot exercise significant influence over Grinwold. (Use the cost method.)
b. Prepare the journal entries for Wellman Company for 2022, assuming Wellman can exercise significant influence over Grinwold. (Use the equity method.)
c. The board of directors of Wellman Company is confused about the differences between the cost and equity methods. Prepare a memorandum for the board that explains each method and shows in tabular form the account balances under each method at December 31, 2022.

Paul D. Kimmel. Accounting: Tools for Business Decision Making, 7th Edition (p. H-18).

Expert Solution

Wellman Compny

Journal Entries
a)	Under cost method

01/01/22	Investment in Grinwold Inc … Dr.	1800000
	To Cash		1800000
	(Purchase of 60000 Shares )

6/30/2022	Cash. …. Dr.	30000
	To Dividend Income		30000
	(Dividend Recd)

12/31/2022	Cash. …. Dr.	30000
	To Dividend Income		30000
	(Dividend Recd)

b)	Under Equity Method

01/01/22	Investment in Grinwold Inc … Dr.	1800000
	To Cash		1800000
	(Purchase of 60000 Shares )

6/30/2022	Cash. …. Dr.	30000
	To Investment in Grinwold Inc		30000
	(Dividend Recd)
12/31/2022	Cash. …. Dr.	30000
	To Investment in Grinwold Inc		30000
	(Dividend Recd)


12/31/2022	Investment in Grinwold Inc … Dr.	240000
	To Equity Income in Grinwold Inc		240000
	(roportionate income of Grinwold Inc )


	Differences Between Cost Method and Equity Method

	Unlike the equity method, the cost method accounts for investments when the investor has no ability to exercise control over the investee's operations. Under the equity method, the initial investment is recorded at cost and this investment is increased or decreased periodically to account for dividends and the earnings or losses of the investee. In contrast, the cost method accounts for the initial investment as a debit to an investments account and the dividends as a credit to a revenues account. Unlike the equity method, cash distributions under the cost method do not affect the carrying balance of the investment.

	Balance of account	Under cost method	Under equity method

	Investment in Grinwold Inc	1800000	1980000
	Dividend	60000	0
	Equity Income in Grinwold Inc	0	240000
	Cash (Net)	-1740000	-1740000

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