Question

On January 1, 2018, Cooley, Inc. decides to invest in 8,750 shares of Yearling stock when the stock is selling for $11 per share. On June 1, 2018. Yearling paid a $1.20 per share cash dividend to stockholders. On December 31, 2018, Yearling reports net income of $70,000 for 2018. Assume Yearling has 25,000 shares of voting stock outstanding during 2018 and Cooley has significant influence over Yearling Read the requirements Requirement 1. Identify what type of investment the Yearling stock is for Cooley. Cooley's investment would be investment Requirement 2. Journalize the transactions related to Cooley's investment in the Yearling stock during 2018. (Record debits first, then credits. Select the explanation on the last line of the journal entry table. If no entry is required, select "No entry required on the first line of the Accounts and Explanation column and leave the remaining cells blank) January 1 Cooley, Inc. decides to invest in 8,750 shares of Yearling stock when the stock is selling for $11 per share Date Accounts and Explanation Debit Credit Jan 1 in the initfields and then continue to the next question

Answer 1

Requirment 1:

Cooley Inc's Investment in Yearling would be Long Term Investment.

Investment by Cooley Inc In Yearling is also termed as Investment in Associate Company as:

1.Cooley Inc has Significant Influence over Yearling.

2.Investment by Cooley Inc in Yearling is between 20%-50% i.e. 35%.

(Percentage of Investment by Cooley Inc. in yearling = (Investment by Cooley Inc in yearling/Total outstanding shares of Yearling) x100

= (8750/25000) x 100

=35%)

Requirement 2:

Investment in associate Company is recorded in books by following the Equity Method.

According to Equity method Following journal entries are passed in the books of Investor.

1. Investment in associate company is recorded at historical cost as:

Investment in Associate company A/c.....Dr.

To Cash A/c

2. Cash dividend paid by associate company to Investor is recorded as:

Cash A/c ....Dr

To Investment in Associate Company A/c

3. Net Income reported by associate Company shall be recorded as :

Investment in Associate Company A/c

To Investment expenditure A/c

Therefore following Journal Entries shall be recorded:

Jan 1:

Investment in Yearling A/c ....Dr $96250 ( 8750 x 11 = 96250)

To Cash A/c $96250

( Being 8750 shares of Yearling purchased for $ 11 per share)

June 1:

Cash A/c ....Dr $10500 (8750 x 1.20 = 10500)

To Investment In Yearling A/c $10500

(Being Dividend of $ 1.20 per share received on 8750 shares)

Dec 31

Investment In Yearling A/c ....Dr $ 24500

To Investment Revenue A/c $ 24500

(Being net income of $ 70000 reported by Yearling and Cooley Inc. share of revenue shall be 70000 x 35% = 24500)

Requirement 3:

Cooley would report a long term investment in Yearling of $ 110250.

Image is attached for Investment in Yearling A/c
Investment in Yearling A/C Dr. Date Particulars Jan 1 To Cash Dec 31 To Investment Revenue Amount ($) Date Particulars 96250 June 1 By Cash 24500 Dec 31 By Balance c/f Cr. Amount ($) 10500 110250 120750 120750