Question

We acquire 30% of the company for a thousand dollars.The fair value of the investee is 3000, and the book value is 2500. The difference is from property plant equipment with a fair 500 higher than its book value. During the year, the investee reports income of 120 and pays dividends of 40. PP&E is being depreciated over 10 years and 10% of initial goodwill is impaired. We acquired 30% of the company for 1000 dollars, fair value is 3000, book value is 2500. You tested annually for impairment. We acquire 30% of the company for a thousand dollars. The fair value of the investee is 3000, and the book value is 2500. The difference is from property plant equipment with a fair 500 higher than its book value. During the year, the investee reports income of 120 and pays dividends of 40. PP&E is being depreciated over 10 years and 10% of initial goodwill is impaired. We acquired 30% of the company for 1000 dollars, fair value is 3000, book value is 2500. You tested annually for impairment.

In the journal entry there is:

Debit: Cash 12

                        Credit: Investment                              12

Could you please tell me what does this do?

Answer 1

As such the question is not clear with many lines being repeated. I assume you are asking about the journal entry mentioned in the end.

The journal entry is

Debit: Cash 12

                        Credit: Investment                              12

This reflects the receipt of 30% dividend of $40 = $12 (Because we hold 30% shares.)

Consequentially, the receipt has been given a credit effect as reduction of Inevstment Carrying Value.

In short Dividend is reduced from the Investment Cost.

This treatmet is generally followed in case of pre-acquisition dividend as the purchase price is inclusive of dividen and the reduction makes the investment cost as Ex-Dividend.

More clarity can be obtained by seeing the full question.