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On January 1, 2010, People Company acquired an 80% interest in Soft Company for $1,000,000. On that date Soft Company had retained earnings of $200,000 and common stock of $800,000. The book values of assets and liabilities were equal to fair values except for the following: Book Value Fair Value Equipment (net) 320,000 520,000 The equipment had an estimated remaining useful life of 5 years. Soft Company reported net income of $30,000 in 2010 and $40,000 in 2011. Dividends were declared and paid in the amount of $10,000 in 2010 and $15,000 in 2011. People Company uses the cost method to record its investment in Soft Company. Required: For 2010: Prepare the CAD.
Expert Answer
Since, the holding is 80%, it is recommended to have equity method but since specified in question, cost method is used to record its investments.
In 2010:
A Investment Account Dr $1,000,000
To Cash Cr $1,000,000
(Entry to record investment under cost method)
Minority interest in Share capital and retained earnings = $200,000 (20% * 1,000,000)
C Entries for elimination is not required since company follow cost method:
Entry Dividend:
Cash Dr $8,000
To Dividend Cr $8,000
(Being Dividend paid)
- No Entries are required
- Journal Entry:
Cash Dr $12,000 ($15,000 * 80%)
To Dividend Cr $12,000
(Being Dividend Paid)
