Question

John Company acquires 60 percent of David Company’s common stock for $200,000 at the beginning of the year and gains significant influence over David. During the year, David has net income of $40,000 and pays dividends of $30,000.

Required: prepare the journal entries in books of John Company under the Equity and Cost Method

Answer 1

Journal Entries in the books of John Company
Cost Method of Accounting
Particulars	Amount in $
	Debit	Credit
Investment in David Company A/c Dr	200000
To Bank A/c		200000
(Being investment made in David Company's stock 60%)
Bank A/c Dr	30000
To Dividend Income A/c		30000
(Being dividend income received)
Equity Method of Accounting
Particulars	Amount in $
	Debit	Credit
Investment in David Company A/c Dr	200000
To Bank A/c		200000
(Being investment made in David Company's stock 60%)
Investment in David Company A/c Dr	24000
To Income from Investment in David Company A/c		24000
(Being income from gain in David's Company 60% of $40,000)
Bank A/c Dr	30000
To Investment in David Company A/c		30000
(Being dividend income treated as return on investment and therefore reduced the value of investments)