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Parent Company acquired 25% of Son Inc. on January 1, 20X5 for $420,000. Son reported earning...

Parent Company acquired 25% of Son Inc. on January 1, 20X5 for $420,000. Son reported earning of $82,000 and declared dividends of $4,000 during 20X5, Parent determined the fair value of its shares in Son to be $450,000 at December 31, 20X5.

Based on the preceding information prepare the journal entries for 20X5 Parent will make to account for its investment in Son, if Parent uses the cost method of accounting for this investment.

Based on the preceding information prepare the journal entries for 20X5 Parent will make to account for its investment in Son, if Parent uses the equity method of accounting for this investment.

Based on the preceding information prepare the journal entries for 20X5 Parent will make to account for its investment in Son, if Parent uses the fair value method of accounting for this investment.

Solutions

Expert Solution

Solution a:

Journal Entries - Parent Company (Cost Method)
Date Particulars Debit Credit
1/1/20X5 Investment in Son Inc. Dr $420,000.00
            To Cash $420,000.00
(Being investment made in Son Inc.)
31/12/20X5 Cash Dr ($4,000*25%) $1,000.00
            To Dividend Revenue $1,000.00
(Being dividend received from Son Inc.)

Solution b:

Journal Entries - Parent Company (Equity Method)
Date Particulars Debit Credit
1/1/20X5 Investment in Son Inc. Dr $420,000.00
            To Cash $420,000.00
(Being investment made in Son Inc.)
31/12/20X5 Investment in Son Inc. Dr $20,500.00
            To Investment Income ($82,000*25%) $20,500.00
(Being share of income recoganised for investment in Associate enterprise - Son Inc.)
31/12/20X5 Cash Dr ($4,000*25%) $1,000.00
            To Investment in Son Inc. $1,000.00
(Being dividend received from Associate enterprise - Son Inc.)

Solution c:

Journal Entries - Parent Company (Fair Value Method)
Date Particulars Debit Credit
1/1/20X5 Investment in Son Inc. - Held for Trading Dr $420,000.00
            To Cash $420,000.00
(Being investment made in Son Inc.)
31/12/20X5 Cash Dr ($4,000*25%) $1,000.00
            To Dividend Revenue $1,000.00
(Being dividend received from Son Inc.)
31/12/20X5 Investment in Son Inc. Dr $30,000.00
            To Gain on held of trading investment $30,000.00
(Being investment recoreded at fair value and gain recoganized)

ekkarill92 answered 1 year ago
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