During review of the adjusting entries to be recorded on December 31, 20X8, Gran
ID: 2459063 • 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 $59,000, at which time Case Products reported retained earnings of $14,000 and capital stock outstanding of $28,000. The differential was attributable to patents with a life of eight years. Income and dividends of Case Products were:
Year Net Income Dividends
20X6 $25,000 $9,000
20X7 33,000 11,000
20X8 41,000 11,000
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.)
Date General Journal Debit Credit
20X8 Investment in Case Products Stock $61,625 (Correct Answer)
Dividend Income 11,000 (Correct Answer)
Income from Case Products ??????
Retained Earnings ??????
Please explain how to get Income from Case Products and Retained Earnings.
Explanation / Answer
Journal Entries:
1) Correcting entries of investment in Case Products: Investment in Case Products --- Dr $59000
Cash --- Cr. $59000
No entry for Earnings of Case Products before the investment on 1 Jan., 20X6.
2) Booking Income of Case Products to Grand Corporation :
December 31,20X8 Earnings (20X6) of Case Products ------- Dr. $16,000
Retained Earnings ------- Cr. $16,000
(Being earnings of case products (100% ownership) for year 20X6 booked to Retained Earnings of Grand)
December 31,20X8 Earnings (20X7) of Case Products ------- Dr. $22,000
Retained Earnings ------- Cr. $22,000
(Being earnings of case products for year 20X7 booked to Retained Earnings of Grand)
December 31,20X8 Earnings (20X8) of Case Products ------- Dr. $30,000
Retained Earnings ------- Cr. $30,000
(Being earnings of case products for year 20X8 booked to Retained Earnings of Grand)
3) Booking Dividend Income from Case Products to Grand Corporation in Grand Books:
December 31,20X8 Cash ------- Dr. $9,000
Dividend Earnings (20X6) on Investment in Case-------- Cr. $9,000
(Being dividend from case products for year 20X6 booked to Grand)
December 31,20X8 Cash ------- Dr. $11,000
Dividend Earnings (20X7) on Investment in Case-------- Cr. $11,000
(Being dividend from case products for year 20X7 booked to Grand)
December 31,20X8 Cash ------- Dr. $11,000
Dividend Earnings (20X8) on Investment in Case-------- Cr. $11,000
(Being dividend from case products for year 20X8 booked to Grand)
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