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In: Accounting

On January 1, 20X1, Warner Corporation purchased 40% of the common stock of ABC Corporation for...

On January 1, 20X1, Warner Corporation purchased 40% of the common stock of ABC Corporation for $400,000. This purchase gives Warner a significant influence in ABC?s operations. During the year, ABC earned total net income of $200,000 and paid total dividends of $40,000 to common stockholders. The fair market value of the stock at year end is $450,000. Prepare the required 20X1 journal entries for the Warner Corporation?s purchase of stock in ABC Corporation:

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Solution:

Notes

Equity method is followed as percentage of holding is more than 20% and less than 50%.

Journal Entries

Warner Corporations

Date

Particulars

    Folio

      Debit($)

Credit($)

1st Jan 20X1

Investment-ABC Corporations A/c Dr.

   Cash A/c                                           Cr.

(Being purchase of 40% of the common stock of ABC Corporations recorded.)

400,000

400,000

20X1

Investment –ABC Corporations A/c            Dr.

     Equity Income-ABC Corporations A/c   Cr. ($200,000*40%)       

(Proportionate share of ABC Corporations’s earnings recorded)

80,000

80,000

20X1

Cash A/c Dr.

      Investment-ABC Corporations A/c Cr. (40,000*40%)

(Proportionate Share of Dividend received from ABC Corporations)

16,000

16,000

ekkarill92 answered 1 year ago
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