Question

Listed below are a few events and transactions of Kodax Company.

Year 1

Jan.		2		Purchased 65,000 shares of Grecco Co. common stock for $471,000 cash. Grecco has 195,000 shares of common stock outstanding, and its activities will be significantly influenced by Kodax.
Sept.		1		Grecco declared and paid a cash dividend of $2.10 per share.
Dec.		31		Grecco announced that net income for the year is $495,900.

Year 2

June		1		Grecco declared and paid a cash dividend of $.90 per share.
Dec.		31		Grecco announced that net income for the year is $715,400.
Dec.		31		Kodax sold 12,000 shares of Grecco for $127,000 cash.

Prepare journal entries to record the above transactions and events of Kodax Company. (Do not round intermediate calculations and round your final answers to the nearest dollar amount.)

Answer 1

The equity method is used when the investor company holds more than 20 percent but less than 50 percent of another company's stock. In this case, the investor has significant power, influence and control over the investee's operations.

Under the equity method, the initial investment is recorded at cost. Afterward, that value gets adjusted periodically to reflect fluctuations in the investment's income and losses. When an investee reports a certain income, the value of the investor's investment increases by an amount proportional to the percentage of ownership.

If the investee pays a dividend, the investor receiving the dividend will record the cash amount but will also record a decrease in the value of the investment on its balance sheet. Under the equity method, dividends are not treated as income, but, instead, they are considered a return of investment.

As Grecco co. is significantly influenced by the Kodax Company, the equity method of accounting will be used.

Percentage of shares held by Kodax Company = 65,000/195,000 = 33.33%

Journal Entries will be as follows:

Date	Account and explanations	Debit	Credit
Year 1
Jan. 02	Investment in Common stock of Grecco Co.	471,000
	Cash		471,000
(To record acquisition of common shares)
Sep. 01	Cash	136,500
	Investment in Common stock of Grecco Co.		136,500
(To record Receipt of Dividend)
Dividend = 60,000 shares * $2.1 = $136,500
Dec. 31	Investment in Common stock of Grecco Co.	165,300
	Revenue from investment in company shares		165,300
(To Record Profit on Equity Investments)
* Profit = $495,900*33.33%=$105,000
Year 2
June. 01	Cash	54,000
	Investment in Common stock of Grecco Co.		54,000
(To record Receipt of Dividend)
Dividend = 60,000 shares * $0.9 = $54,000
Dec. 31	Investment in Common stock of Grecco Co.	238,467
	Revenue from investment in company shares		238,467
(To Record Profit on Equity Investments)
* Profit = $715,400*33.33%=$238,467
Carrying value of Investment = $471,000 -$136500 + $165300-$54000+$238467 = $684,267
Value per share held = $684,267/65,000 shares = $10.5271
Value of 12,000 shares sold = 12,000 shares*$10.5271 = $126,326
Dec. 31	Cash	127,000
	Profit of sale on Investments		674
	Investment in Common stock of Grecco Co.		126,326
(To Record sale of 12,000 shares)