During review of the adjusting entries to be recorded on December 31, 20X8, Gran

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:

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.)

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

Explanation / Answer

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

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

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