Question

1-. Passion Company created Sound Company with a transfer of $ 1,000 cash. During Sound Company’s first year of operation, it generated a net loss of $ 180 and paid no dividend. During Sound Company’s Second year of operation, it generated net income of $ 350 and paid dividend of $ 70. What journal entries would Passion Company make under Cost Method and Equity Method for both of the years?

2-. Petro Company acquires 18% of Santro Company’s Common Stock for $ 250,000 at the beginning of the year but does not gain significant influence over Santro. During the year Santro has net income of $ 75,000 and pays dividend of $ 15,000. Record the necessary transactions in the book of Petro Company applying Cost Method.

Answer 1

1	Cost method
	Valuation of the investment at the historical price
	Investment Account					1000
	To bank						1000
	(Investment creation in the subsidary)
	Bank Account					70
	To Dividend income received						70
	(receving of the dividend )
	Equity method
	Investment Account					1000
	To bank						1000
	(Investment creation in the subsidary)
	Loss on the investment in the subsidiary Account					180
	To Investment account						180
	(first year of the loss in the company)
	Investment account					350
	To Profit on the investment in the subsidiary account						350
	(second year of the profit in the company)
	Bank Account					70
	To Investment account						70
	(receving of the dividend )
2	Cost method
	Valuation of the investment at the historical price
	Investment Account					250000
	To bank						250000
	(Investment creation in the subsidary)
	Bank Account					2700
	To Dividend income received						2700
	(receving of the dividend )