On 01/01/2013, Yaro Company owns 30% of the common stock of Dew Co. with $450,00

Question

On 01/01/2013, Yaro Company owns 30% of the common stock of Dew Co. with $450,000 cash and 10,000 shares ($1 face value and $15 market value) that are issued acquire the Dew’s shares. Assume that Yaro gain significance influence over Dew.

During 2013, Dew reported income of $250,000 and paid cash dividends of $80,000. There is no amortization associated with the investment. During 2013, how much income should Yaro recognize related to this investment? What is the balance of the investment account by the end of 2013? Please also write down the journal entries that are related to the investment account.

Explanation / Answer

Req 1: Net Income Reported by Dew Co. 250000 % holding by Yaro Company 30% Net Income to be recognized by Yaro 75000 Req 2: Investment purchased (450000+150000) 600000 Less: Dividend receivevd (80000*30%) 24000 Add: Net income recognized 75000 Investment cost at the end of year 651000 Req 3: Journal entries: For dividend receievd: Cash account Dr. 24000     Investment in Dew Co. 24000 For reported Income of Dew: Investment in Dew Co. Dr. 75000      Investment Income 75000

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