ii. Prepare the necessary journals for the year ended December 31 for Kevin S.A. in respect...

ii. Prepare the necessary journals for the year ended December 31 for Kevin S.A. in respect of its investment in Paris Holdings S.A.

Kevin S.A. purchased 80,000 shares, 25% of the outstanding shares of Paris Holdings S.A. for €2,500,000 on January 1. Paris Holdings S.A. paid a dividend of €1.25 per share on June 30 of the same year and recorded a net profit after tax of €576,000 for the year ended December 31.

Required:

i. Described what method should Kevin S.A. use to account for its investment in Paris Holdings S.A. Explain your answer.

Expert Solution

Kevin S.A. holding is 25 percent in Paris Holding S.A.

Methods for Accounting Investment is decided on the basis of Ownership Interest in investee company as illustrated below -

When investment is less than 20 percent - Fair Value Method
When investment is more than 20 percent but less than 50 percent - Equity Method
When investment is more than 50 percent - Cost or Equity method are used.

As we know that Kevin S.A. investment in Paris Holding S.A. is 25 percent, so, we will use Equity Method for accounting of investment's.

In the Books of Kevin S.A.

JOURNAL ENTRIES

Date	Particulars	L.F	Dr.	Cr.
January - 1	Equity Investment (Paris Holding S.A.) Dr.		2,500,000
	Cash			2,500,000
	(being investment made in Paris Holding by buying 80,000 equity shares for 2,500,000) (In equity method investment are recorded at cost)

June - 30	Cash Dr.		100,000
	Equity Investment (Paris Holding S.A.)			100,000
	(dividend recieved on 80,000 shares @1.25 per share)

December - 31	Equity Investment (Paris Holding S.A.) Dr.		144,000
	Investment Income			144,000
	(recording of income declared by investee company in equity investment account) (576,000*25/100)

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