Question

Natalie has been approached by Ken Thornton, a shareholder of The Beanery Coffee Inc. Ken wants to retire and would like to sell his 1,000 shares which represents 30% of all shares issued. The Beanery is currently operated by Ken's twin daughters, who each own 35% of the common shares. The Beanery not only operates a coffee shop but also roasts and sells beans to retailers, under the name "Rocky Mountain Beanery.' The Beanery Coffee, The business has been operating for approximately 5 years. In the last 2 years Ken has lost interest and left the day-to-day operations to his daughters. Both daughters at times find the work at the coffee shop overwhelming. They would like to have a third shareholder involved to take over some of the responsibilities of running a small business. Both feel that Natalie and Curtis are entr said that they plan to operate this business for anotenerial in spirit and that their expertise would be a welcome addition to the business operation. The twins have also ther 10 years and then retire. Ken has met with Curtis and Natalie to discuss the business operation. All have concluded that there would be many advantages for Cookie & Coffee Creations Inc. to acquire an interest in The Beanery Coffee. One of the major advantages would be volume discounts for purchases of the coffee bean inventory. Despite the apparent advantages, however, Natalie and Curtis are still not convinced that they should participate in this business venture. Assume that Ken wants to sell his 1,000 shares of The Beanery Coffee for $15,000 Prepare the journal entry required if Cookie & Coffee Creations Inc. buys Ken's shares. (If no entry is required, select "No Entry" for the account titles and enter 0 for the amounts. Credit account titles are automatically indented when amount is entered. Do not indent manually.) Account Titles and Explanation Debit Credit Assume that Cookie & Coffee Creations Inc. buys the shares and in the following year The Beanery Coffee earns $50,000 net income and pays $25,000 in dividends. Prepare the journal entries required under both the cost method and the equity method of accounting for this investment. (If no entry is required, select "No Entry" for the account titles and enter 0 for the amounts. Credit account titles are automatically indented when amount is entered. Do not indent manually.) Account Titles and Explanation Debit Credit Cost Method: Equity Method: (To record equity in Beanery's net income) (To record dividends received) Identify where this investment would be classified on the balance sheet of Cookie & Coffee Creations Inc. in balance sheet. Investment would be classified as a SHOW LIST OF ACCOUNTS LINK TO TЕXT LINK TO ТЕXT What amount would appear on the balance sheet under each of the methods of accounting for the investment? Cost method Equity method Open Show Work Click if you would like to Show Work for this question:

Answer 1

Journal Entries

In the books of cookie & Coffee creations

Cost Method

Investment in shares of Beanery coffee a/c Dr $15000

To Bank a/c $15000

(being shares of Ken purchased by cookie & coffee creations)

Equity Method

Investment in shares of Beanery coffee a/c Dr $15000

To Bank a/c $15000

(being shares purchased)

In the books of Beanery coffee

No Entry

When Beanery coffee earns $50,000 net income and pays $25,000 in dividends in the next year, Journal entries would be as follows

Cost Method

Bank account Dr $7500

To Dividend account $7500

(being dividend received)

Equity Method

Investment in shares account Dr $15000

To Income Statement account $15000

($50000 x 30% = $15000)

(being income earned by Beanery coffee reported)

Bank account Dr $7500

To Investment in shares account $7500

(Being dividend income received)

Amount that would appear on the balance sheet as follows

Cost Method = $15000

Equity Method = $15000+$15000-$7500 = $22500

This investment will be classified as Long term investments in the balance sheet of cookie & Coffee creations