At a total cost of $4,000,000, Simpson Corporation acquired 320,000 shares of Li

Question

At a total cost of $4,000,000, Simpson Corporation acquired 320,000 shares of Lisbon Corp. common

      stock as a long-term investment. Simpson Corporation uses the equity method of accounting for this

      investment. Lisbon Corp. has 800,000 shares of common stock outstanding, including the shares

      acquired by Simpson Corporation.

                A. Journalize the entries by Simpson Corporation to record the following information:

                                1. Lisbon Corp. reports net income of $2,400,000 for the current period.

                                2. A cash dividend of $4.00 per common share is paid by Lisbon Corp. during the current

                                     period.

                B. Why should Simpson Corporation use the equity method to account for the investment in

      Lisbon Corp.?

Explanation / Answer

Simpson Corporation use the equity method to account for the investment in

      Lisbon Corp. to make consolidated balance sheet

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