Question

Reden Corporation purchased 30 percent of Montgomery Company’s common stock on January 1, 20X9, at underlying book value of $195,600. Montgomery’s balance sheet contained the following stockholders’ equity balances:

Preferred Stock $4 par value, 42,000 shares issued and outstanding) Common Stock ($1 par value, 134,000 shares issued and outstanding) Additional Paid-In Capital Retained Earnings Total Stockholders' Equity $ 168,000 134,000 196,000 322,000 $820,000 Montgomery's preferred stock is cumulative and pays a 5 percent annual dividend. Montgomery reported net income of $104,000 for 20x9 and paid total dividends of $40,000. Required: Give the journal entries recorded by Reden Corporation for 20X9 related to its investment in Montgomery Company common stock. (If no entry is required for a transaction/event, select "No journal entry required" in the first account field.) View transaction list Journal entry worksheet <ABC Record the purchase of Montgomery Company stock. Note: Enter debits before credits. Event General Journal Debit Credit Record entry Clear entry View general journal

Answer 1

JOURNAL ENTRIES

1) PURCHASE OF MONTGOMERY COMMON STOCK

COMMON STOCK A/C                             DR. $195,600

       TO BANK A/C                                                      $195,600

(BEING COMMON STOCK OF 40,200 PURCHASED)

2) DIVIDEND FROM MONTGOMERY COMPANY

BANK A/C                                                DR. $10,440*

        TO DIVIDEND FROM MONTGOMERY COMPANY    $10,440*

3) EQUITY METHOD INCOME

EQUITY METHOD INVESTMENT A/C          DR. $195600

         TO BANK A/C                                                       $ 195600

*CALCULATION OF $ 10440 IS GIVEN IN THE IMAGE BELOW

= 520 - 104000 x 5% = 104000 x 5 Pref. shares Shores Dindend - 40000 - 5200 common shores Dividend = 3480 Our stake 30% x 34800 I 10440