Question

During review of the adjusting entries to be recorded on December 31, 20X8, Grand Corporation discovered that it had inappropriately been using the cost method in accounting for its investment in Case Products Corporation. Grand purchased 100 percent ownership of Case Products on January 1, 20X6, for $56,000, at which time Case Products reported retained earnings of $14,000 and capital stock outstanding of $27,000. The differential was attributable to patents with a life of eight years. Income and dividends of Case Products were:

Year Net Income Dividends

20X6 $24,000 $8,000

20X7 32,000 10,000

20X8 40,000 10,000

Required:

Prepare the correcting entry required on December 31, 20X8, to properly report the investment under the equity method, assuming the books have not been closed. Case Products' dividends were declared in early November and paid in early December each year.

Record the correcting entry. 20X8

Answer 1

Date	General Ledger	Debit	credit
20X8	Investment in case products stock	62375
	Dividend income	10000
	To income from case products		38125
	To Retained earnings		34250
Computation of correction of investment account :
Addition to income for investment income :
20X6	24000
20X7	32000
20X8	40000	96000
Deductions for dividend received
20X6	8000
20X7	10000
20X8	10000	-28000
Ammortization differential
Purchase price	56000
Proportionate share of book value of net assets	-41000
(14000+27000)
Amount of differential	15000
Amortization for 3 years	(15000*3/8)	-5625
Required correction of investment account		62375
Computation of correction of retained earnings
Dividend income recorded in 20X6 AND 20X7	18000
Equity method income in 20X6 & 20X7	52250
(24000-1875) (32000-1875)					1875
Retained earnings	34250