Homework Answers
Answer:
Prepare journal entries on Pirate Corporation's books relating to its investment in Ship Company for each of the three years, assuming it accounts for the investment using the equity method.
| Event | General Journal | Debit | Credit |
| (1a) | Investment in ship company stock A/c Dr. | $281,000 | |
| To Cash A/c | $281,000 | ||
| (To record the purchase of ship company for 20X5) | |||
| (1b) | Cash A/c Dr. | $7,000 | |
| To Investment A/c | $7,000 | ||
| (To record dividend from ship company for 20X5) | |||
| (1c) | Investment in ship company stock A/c Dr. | $27,000 | |
| To Income from ship company A/c | $27,000 | ||
| (To record the equity-method income for 20X5) | |||
| (1d) | Income from ship company A/c Dr. | $13,800 | |
| To Investment in ship company stock A/c ( Notes 1) | $13,800 | ||
| ( To record amortization of differential value for 20X5) | |||
| (2a) | Cash A/c Dr. | $17,000 | |
| To Investment in ship company A/c | $17,000 | ||
| (To record dividend from ship company for 20X6) | |||
| (2b) | Investment in ship company stock A/c Dr. | $47,000 | |
| To Income from ship company A/c | $47,000 | ||
| ( To record the equity-method income for 20X6) | |||
| (2c) | Income from ship company A/c Dr. | $13,800 | |
| To Investment in ship company stock ( Notes 1) | $13,800 | ||
| (To record amortization of the differential value for 20X6) | |||
| (3a) | Cash A/c Dr. | $38,000 | |
| To Investment in ship company stock A/c | $38,000 | ||
| (To record dividend from ship company for 20X7) | |||
| (3b) | Investment in ship company stockA/c Dr. | $27,000 | |
| To Income from ship company | $27,000 | ||
| (To record the equity-method income for 20X7) | |||
| (3c) | Income from ship company A/c Dr. | $13,800 | |
| To Investment in ship company stock ( Notes 1) | $13,800 | ||
| (To record the amortization of the differential value for 20X7) | |||
Notes:
1. Amortization of the differential value for 20X5, 20X6, 20X7 = Purchase price of ownership of ship company – Book value of ship's reported net assets ÷ 5 years
= ($281,000 – $212,000) ÷ 5 years
Amortization of differential value for 20X5, 20X6, 20X7 =$13,800
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