1

Company P purchases 30% of the outstanding common stock of Company S on January 2, 2009 for $400,000 cash.
During 2009, Company S reported net income of $300,000 to its shareholders, and declared $100,000 dividends to its shareholders.
Required:
Prepare all journal entries necessary (on
Company P’s books) to record this investment using the equity method of accounting.
2

1.
Acquisition:
L.T. Investment 400,000
Cash 400,000
2.
Dividends declared (100,000 x 30%)
Div. Receivable 30,000
L.T. Investment 30,000
3.
Income reported (300,000 x 30%)
L. T. Investment
Income from S
90,000
90,000
3

Prepare the following journal entries for Jackson
Company for 2007. Assume there were no other investments prior to the following activities.
Feb. 17 - Purchased 500 shares of Medical Company common stock for $20 per share (classified as trading securities):
Invest in Medical 10,000
Cash 10,000
March 31 - Received a $1.20 per share dividend on
Medical Company stock:
Cash 600
Dividend Income 600
4

April 1 - Purchased 30,000 of the 100,000 outstanding shares of Olde Company common stock at $10 per share.
Classification of Investment?
Equity investment
Invest in Olde
Cash
300,000
300,000
June 28 - Received a $1.00 share dividend on the
Olde Company stock:
Cash
Invest. in Olde
30,000
30,000
5

Oct. 1 - Purchased 2,000 of Alpha Company common stock for $15 per share.
These shares are classified as available-for-sale.
Invest in Alpha
Cash
30,000
30,000
Dec. 31 - Olde Company reported annual earnings of $80,000 to its investors:
80,000 x .3
Invest. in Olde
Income from Olde
24,000
24,000
6

Dec. 31 AJEs - At the end of the year, the following market prices per share were reported:
Medical Co. (trading) $25 per share
Alpha Co. (AFS) $12 per share
Olde Co. (equity) $11 per share
AJE for Medical?
$20 to $25 = $5 gain x 500 shares
Invest in Medical 2,500
Unrealized Gain (I/S) 2,500
AJE for Alpha?
$15 to $12 = $3 loss x 2,000 shares
Unrealized loss (SE) 6,000
Invest. in Alpha 6,000
AJE for Olde?
NO! - equity method - no revaluation
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What total effect would the previous transactions have on the income statement for 2007?
3/31 Dividend income + 600
12/31 Income from Olde + 24,000
12/31 Unrealized gain on Med. + 2,500
Total +27,100
What effect would the previous transactions have on other comprehensive income for
2007?
12/31 Unrealized loss on Alpha - 6,000
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