Spritz Company owns 15% of the stock of Turner Corporation. The investment was p
ID: 2339086 • Letter: S
Question
Spritz Company owns 15% of the stock of Turner Corporation. The investment was purchased for $200,000. At the beginning of 2020, it had a fair value of $230,000. At the end of 2020, its fair value is $250,000. Turner reported net income of $100,000 for 2020, and declared and paid cash dividends of $60,000. Spritz sells products to Turner at a markup of 20% on cost. Turner’s ending inventory for 2020 included a balance of $10,800 for products purchased from Spritz.
Required
Prepare the journal entries Spritz makes in 2020 to record the above facts, assuming that Spritz treats its investment as having significant influence and uses the equity method.
Explanation / Answer
The following journal entries to be made in the books of Spritz in the year 2020:
1. Share of the associate's profit:
Investment in Turner Corporation Dr $15,000
To Share of income of associate Cr $15,000
2. Dividend received from the associate is substracted from the cost of the investment:
Cash a/c Dr. $9,000
To Investment in Turner Corporation Cr. $9,000
(Being share of dividend income recorded as reduction in investment)
3. For sales to Turner corp during the year:
Turner Corporation (Receivable) Dr. 10,800
To Sales Cr. 10,800
4. For recording cost transfer of above entry:
Cost of goods sold Dr $9,000
To Inventory Cr $9,000
The investment in associate is reported as a non-current asset on the balance sheet at its carrying amount which is calculated as follows:
Investment in Turner Corporation as at 1 Jan 2020: $200,000
Add: share in profit of Turner corporation : $15,000
Less: dividends received from Turner corporation : $9,000
Investment in Turner Corporation as at 31 Dec 2020: $206,000
(Assumption: Fair value has been ignored assuming cost model is being adopted)
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