Question

Question 2 (25 marks)

Unit 8 - Investments

The Trendy Clothing Corporation reported the following transactions for the year 2019:

Jan.1               Purchased 35% of the common shares of Cool Hoodies Corporation for $550,000.

This is a long-term investment giving Trendy Clothing significant influence over the operations of Cool Hoodies.

Sept. 30           Received a $34,000 dividend on the Cool Hoodies Corporation stock.

Dec. 31           Cool Hoodies Corporation reported net income of $167,500 for the year ended December 31, 2019.

Dec. 31           Trendy Clothing sold 50% of the Cool Hoodies shares for $300,000.

Prepare journal entries to record all the above events for the Trendy Clothing Corporation.

		Debit	Credit
Jan 1
Sept 30
Dec 31
	.

Why is understanding the extent to which one company influences another company important for accounting purposes? What impact does the degree of influence have on accounting?

When the equity method is used to account for a stock investment, dividends received are recorded as a reduction to the Investment account and the investor's share of income reported by the investee is treated as an increase in the Investment account. Explain why the investment is accounted for in this fashion.

Answer 1

S. no.	Account titles	Debit	Credit
01-Jan	Investment in Cool Hoodies Corporation	$550000
	Cash		$550000
	(To record investment purchase)
30-sep	Cash	$34000
	Investment in Cool Hoodies Corporation		$34000
	(To record receipt of dividends)
31-Dec	Investment in Cool Hoodies Corporation ($167500*35%)	$58625
	Equity Income from investment / Investment revenue		$58625
	(To record proportionate share of investee's net income)
31-Dec	cash dr	300000
	Investment in Cool Hoodies Corporation 574625/2= 287312.5		287312.5
	gain on sale of investment		12687.5

when stock purchased is between 20% and 50% of the common stock outstanding, the purchasing company's influence over the acquired company, here Trendy Clothing Corporation is purchasing company and Cool Hoodies Corporation is acquired company so Trendy Clothing Corporation is infuance Cool Hoodies Corporation