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2 Parent Company purchased 100 percent of Son Inc. on January 1, 20X2 for $420,000. Son...

2 Parent Company purchased 100 percent of Son Inc. on January 1, 20X2 for $420,000. Son reported earnings of $82,000 and declared dividends of $4,000 during 20X2. Required: 1. Assuming Parent carries its investment in Son at cost, what is the balance in Parent's Investment in Son account on December 31, 20X2, prior to consolidation? 2. Assuming Parent uses the equity method to account for its investment in Son, what is the balance in Parent's Investment in Son account on December 31, 20X2, prior to consolidation?

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Ans.

Cost Method of Accounting Investment

Under cost method of accounting the Investment are initially recognised at Transaction Cost and dividend declared is recognised as income in P or L.

Parent Investment in Son Account

Journal Entries in the Books of Parent Co.

Date Journal Entry Debit Credit
On purchase of Son Inc. Shares
1stJan,2002 Investment in son A/c $420,000 -
To Bank/Cash A/c - $420,000
(Being investment in Son. Inc Recognised)
On receipt of dividend declared by Son Inc.
31st Dec,2002 Bank/Cash A/c $4,000 -
To Dividend Income - $4,000
(Being dividend Income received and recognised in the book)
Under cost Method Investment in Son.inc $420,000

Equity Method of Accounting Investment

Under Equity Method of Accounting the investment are initially recognised at cost and subsequently adjusted for dividend income received and Net income .

Parents Investment in Son Inc.

Journal Entries in the Books of Parents Co.

Date Journal Entry Debit Credit
On Purchase of Investment
1stJan,2002 Investment in Son Inc. A/c $420,000
To Bank / Cash A/c $420,000
(Being investment in Son Inc. recognised)
On receipt of dividend declared by Son Inc.
31stDec,2002 Bank/ Cash A/c $4,000
To Investment in Son Inc. A/c $4,000
(Being dividend declared recognised as deduction from Investment)
Earning of Son Inc. recognised
31stDec,2002 Investment in Son Inc. A/c $82,000 -
To Investment Revenue A/c - $82,000
(Being Investment Revenue from Son Inc. Recognised)

​​Investment in Son Inc.= Orginal cost - Dividend Income + Investment Revenue

Investment In Son Inc. = $420,000-$4,000+$82,000

=$498,000

Under Equity Method Investment In Son Inc. $498,000

ekkarill92 answered 1 year ago
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