Question

Question 22 (4 points) Smith, Inc. uses the Simple Equity Method to account for the net income of Redstone, Inc., a company Smith, Inc. owns 100 % of the outstanding stock of. When Redstone, Inc. reports quarterly Net Income of $80,000 on 6/30/19, Smith, Inc. will: a) Debit the Investment and Credit Investment Income $80,000 b) Debit Investment Income and Credit the Inivestment $80,000 O c) Smith, Inc. will make no journal entry resulting from this transaction d) Debit Dividends Receivable and Credit Investment Income $20,000 as it's only for a quarter of the year Company P purchased 100 % of the outstanding common stock of Company S on 1/1/19 for $700,000 in cash and stock. Company P accounts for the income of Company S using the Simple Equity Method, and during the year Company S reported Net Income of $100,000 and declared and paid dividends of $70,000. Assuming no other transaction between the two companies, the balance in "Investment in Company S" on the books of Company P on 12/31/19 will be: O a) $730,000 b) $0 O c) $600,000 d) $630,000

Answer 1

1.

Under simple equity method, when the subsidiary company reports net income, the parent company records it by a debit to the investment account and a credit to investment income account.

Therefore, the correct answer is a) Debit the investment and credit investment income $80,000.

2.

Under the simple equity method, net income reported by the subsidiary increases the balance of investment account and when the subsidiary declares dividends it decreases the balance of investment account in the books of the parent company.

Therefore,  

Balance in the Investment in Company S account = $700,000 + $100,000 - $70,000 = $730,000

The correct answer is a) $730,000