EX 15-10 Equity method for stock investment At a total cost of $660,000, Penn Co

Question

EX 15-10 Equity method for stock investment At a total cost of $660,000, Penn Corporation acquired 60,000 shares of Teller Corp. common stock as a long-term investment. Penn Corporation uses the equity method of accounting for this investment. Teller Corp. has 200,000 shares of common stock outstand- ing, including the shares acquired by Penn Corporation. Journalize the entries by Penn Corporation to record the following information: a. Teller Corp. reports net income of $940,000 for the current period. b. A cash dividend of $2.50 per common share is paid by Teller Corp. during the current period. c. Why is the equity method appropriate for the Teller Corp. investment?

Explanation / Answer

Answer

A.

Debit Investment in Teller Corp 282,000
Credit Investment Income 282,000

[(60,000 / 200,000) x 940,000]

B.

Debit Cash 150,000
Credit Investment in Teller Corp 150,000

[60,000 x 2.50]

C.

The equity method appropriate for the Teller Corp. investment

Because Penn owns [60,000 / 200,000] 30% of Teller Corp.

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