Question

POP Corp. paid $328,000 cash for a 40% interest in SON Limited on January 1, Year...

POP Corp. paid $328,000 cash for a 40% interest in SON Limited on January 1, Year 6 and based on this percentage ownership, POP has significant influence over SON. During Year 6, SON declared, but did not yet pay, cash paid dividends of $122,000. Dividends will be paid in early January, Year 7. SON reported profit as follows:

After-tax Profit before discontinued operations $528,500

Discontinued operations gain (net of tax) 105,000

OCI Loss booked on FV-OCI Investment (net of tax) (13,000)

Profit $620,500

Required: Assume that POP has significant influence over SON and uses the equity method to account for the Investment in SON.

(i) Prepare all journal entries necessary, with explanation, to account for POP’s investment for Year 6. Make sure you also include the entry to record the initial investment is SON. No need to date entries.

(ii) Determine the correct balance in POP’s investment account at December 31, Year 6.

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Answer #1
JOURNAL ENTRIES
1 Dr Cr
Investment in SON Ltd A/c    328,000.00
               To Cash A/c    328,000.00
(Bought 40% stake In SON Ltd )
Divdend receivable a/c    122,000.00
              To Other income a/c    122,000.00
(Entry for dividend receovables from SON)
2 Investment    328,000.00
40% Share In SON Profit of 620,500    248,200.00
Investment Value    576,200.00
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