Question

Listed below are a few events and transactions of Kodax Company. Year 1 Jan. 2 Purchased 62,000 shares of Grecco Co. common stock for $586,000 cash. Grecco has 186,000 shares of common stock outstanding, and its activities will be significantly influenced by Kodax. Sept. 1 Grecco declared and paid a cash dividend of $1.50 per share. Dec. 31 Grecco announced that net income for the year is $516,900. Year 2 June 1 Grecco declared and paid a cash dividend of $1.60 per share. Dec. 31 Grecco announced that net income for the year is $750,400. Dec. 31 Kodax sold 12,000 shares of Grecco for $170,000 cash. Prepare journal entries to record the above transactions and events of Kodax Company. (Do not round intermediate calculations and round your final answers to the nearest dollar amount.)

Answer 1

% of shares holding = (62,000/186,000) x 100 = 33.33333%

Activities are significantly influenced. So, Equity method applied.

Journal Entries:

No	Date	Account title and Explanation	Debit	Credit
1	Jan 2, Year 1	Equity method investment	586,000
		Cash		586,000
		[To record purchase of Grecco Co. Common shares]
2	Sept.1, Year 1	Cash [62,000 x $1.50]	93,000
		Equity method investment		93,000
		[To record dividend received]
3	Dec.31, Year 1	Equity method investments [516,900 x 33.33333%]	172,300
		Earnings from equity method investments		172,300
		[To record earnings from Grecco Co.]
4	June 1, Year 2	Cash [62,000 x $1.60]	99,200
		Equity method investment		99,200
5	Dec. 31, Year 2	Equity method investments [750,400 x 33.33333%]	250,133
		Earnings from equity method investments		250,133
		[To record earnings from Grecco Co.]
6	Dec. 31, Year 2	Cash	170,000
		Equity method investments*		157,981
		Gain on sale of stock investments		12,019
		[To record sale of 12,000 shares in Grecco Co.]

*Calculations:

T-Account:

Equity method investment
586,000	93,000
172,300	99,200
250,133
Bal. 816,233

Carrying value of the 62,000 shares is $816,233

Carrying value of the 12,000 shares = (12,000/62,000) x 816,233

= 157,980.60 or

=157,981 (rounded to nearest dollar amount)