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 $58,000, at which time Case Products reported retained earnings of $11,000 and capital stock outstanding of $29,000. The differential was attributable to patents with a life of eight years. Income and dividends of Case Products were:

Year	Net Income				Dividends
20X6		$	19,000			$	7,000
20X7			27,000				9,000
20X8			35,000				9,000

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. (If no entry is required for a transaction/event, select "No journal entry required" in the first account field.)

Answer 1

Date	General Journal	Debit	Credit
20X8	investment in case products stock	42500
	Dividend income	9000
	Income from case products (42500+9000-21000) (balancing figure)		30500
	Retained earnings		21000

Computation of correction of investment account

Addition to account for investment income:

20X6: $19,000

20X7: $27,000

20X8: $35,000............... .. $81,000

Deduction for dividends received:

20X6: $7,000

20X7: $9,000

20X8: $9,000....................... $ (25,000)

Amortization of differential:

Purchase price$ 58,000

Proportionate share of book value of net assets($11,000 + $29,000)(40,000)

Amount of differential$ 18,000

Amortization for 3 years [($18,000 / 4) × 3].......... (13500)

Required correction of investment account......... $ 42500

Computation of correction of retained earnings of Grand Corporation

Dividend income recorded in

20X6: $7,000

20X7: $9,000.......................... .......... .... $(16,000 )

Equity-method income in

20X6: ($19,000 – $4500)$ 14500

20X7: ($27000 – $4500)22500............ ..... 37000

Required correction of retained earnings..... $21,000