Ling Corporation uses the equity method to account for its ownership of 35% of the common...
Ling Corporation uses the equity method to account for its ownership of 35% of the common stock of Gorman Packing. During 2017, Gorman reported a net income of $80,000 and declares and pays cash dividends of $10,000. Ling's 35% ownership of Gorman's common stock increased in value by $10,000 over the course of the past year. What recognition should Ling Corporation give to these events?
Homework Answers
Solution:
Journal entries:
|
General Journal |
Debit |
Credit |
|
Investment in affiliate (35% × 80,000) |
28,000 |
|
|
Equity in earnings of affiliate |
||
|
Cash (35% * 10,000) |
3,500 |
|
|
Investment in affiliate |
3,500 |
By erroneously recognizing amount of dividend as revenue for $3,500, retained earnings would be overstated. Dividends have to be booked as a reduction of the investment; therefore the event causes an overstated investment for $24,500 (=28,000-3,500).
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