Listed below are a few events and transactions of Kodax Company 2017 Dan. 2 Purc

Question

Listed below are a few events and transactions of Kodax Company 2017 Dan. 2 Purchased 21,0ee Sept. 1 Grecco declared and paid a cash dividend of $3.50 per share. shares of Grecco Co. common stock for $428,000 cash plusa broker's fee of $5,000 cash. Grecco has 70,000 shares of common stock outstanding, and its policies will be significantly influenced by Kodax. c. 31 Grecco announced that net income for the year is $516,90. 2018 une 1 Grecco declared and paid a cash dividend of $4.10 per share. Dec. 31 Grecco announced that net income for the year is $750,400. Dec. 31 Kodax sold 12,000 shares of Grecco for $428,000 cash Prepare journal entries to record the above transactions and events of Kodax Company. (Do not round intermediate celculations and round your final answers to the nearest dollar amount.)

Explanation / Answer

First, Kodax Company has invested in 30 % of the shares of Grecco Co. Secondly, as a result of the acquisition, Kodax Company can significantly influence the policies of Grecco. Significant influence is generally determined by an investor owning between 20 % to 50 % of the investee company's outstanding voting stock.

Given this backdrop, the Equity Method of investment accounting will be followed. Accordingly, any share of dividends from Grecco Co. will not be recognized as dividend revenue in the income statement of Kodax Company, rather it will be deducted from its investment in Grecco. This is because any dividends are considered to be return on investment under the Equity Method, and hence are reduced from the asset.

Any share of net income of Grecco will be recognized as investment income in the income statement of Kodax Company, and will simultaneously increase its investment in Grecco.

In the books of Kodax Company:

Equity Investments: Grecco Co. ( $ 516,900 x 21,000 / 70,000)

Book value of the investment at the time of sale:

Date Account Titles Debit Credit $ $ Jan 2, 2017 Equity Investment : Grecco Co. 433,000 Cash 433,000 To record acquisition of the investment Sept 1, 2017 Cash 73,500 Equity Investment : Grecco Co. 73,500 To record receipt of dividends from investee Dec 31, 2017

Equity Investments: Grecco Co. ( $ 516,900 x 21,000 / 70,000)

155,070 Investment Income 155,070 To record equity in investee earnings June 1, 2018 Cash 86,100 Equity Investment: Grecco Co. 86,100 To record receipt of dividends from investee Dec 31, 2018 Equity Investment: Grecco Co. ( $ 750,400 / 70,000 x 21,000 ) 225,120 Investment Income 225,120 To record equity in investee earnings Dec 31, 2018 Cash 420,000 Equity Investment: Grecco Co. ( $ 653,590 x 12,000 / 21,000) 373,480 Gain on Sale of Equity Investment 46,520 To record sale of equity investment

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