During review of the adjusting entries to be recorded on December 31, 20X8, Gran
ID: 2392796 • Letter: D
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 $56,000, at which time Case Products reported retained earnings of $14,000 and capital stock outstanding of $27,000. The differential was attributable to patents with a life of eight years. Income and dividends of Case Products were:
Year Net Income Dividends
20X6 $24,000 $8,000
20X7 32,000 10,000
20X8 40,000 10,000
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.
Record the correcting entry. 20X8
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.
Explanation / Answer
Date General Ledger Debit credit 20X8 Investment in case products stock 62375 Dividend income 10000 To income from case products 38125 To Retained earnings 34250 Computation of correction of investment account : Addition to income for investment income : 20X6 24000 20X7 32000 20X8 40000 96000 Deductions for dividend received 20X6 8000 20X7 10000 20X8 10000 -28000 Ammortization differential Purchase price 56000 Proportionate share of book value of net assets -41000 (14000+27000) Amount of differential 15000 Amortization for 3 years (15000*3/8) -5625 Required correction of investment account 62375 Computation of correction of retained earnings Dividend income recorded in 20X6 AND 20X7 18000 Equity method income in 20X6 & 20X7 52250 (24000-1875) (32000-1875) 1875 Retained earnings 34250
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