Question

Old Enterprises Inc. acquired 10% of the 100,000 outstanding common shares of New Ltd. on January...

Old Enterprises Inc. acquired 10% of the 100,000 outstanding common shares of New Ltd. on January 1, 2018 for a cash consideration of $100,000.

New Ltd. Earned income of $150,000 in 2018 and $180,000 in 2019 (evenly over both years) and paid a regular annual dividend of $120,000 in December each year.


Old Enterprises does not have significant influence over New Ltd. and elected when it first acquired its initial investment in New Ltd.to account for this investment through other comprehensive income. The company's shares were trading for $11 at the end of 2018 and $12.50 at the end of 2019.

In 2020, Old acquired another 10% shares of New for a cash consideration of $130,000. By that Old gained significant influence over New Ltd. Income earned and dividend paid by New Ltd. for year 2020 are as follows:

Income from operation                                   $ 300,00

Less: Loss from discontinued operation           50,000

Net income                                                      250,000

Other comprehensive income (net)                  30,000

Total comprehensive income                          280,000

Divided paid $ 200,000 for year 2020 by New Ltd.

Prepare dated journal entries for Old Enterprises for 2018,2019 and 2020.

Business   Accounting   
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Answer #1

1. Jan 1, 2018 :

Dr. Outstanding shares $1,00,000

Cr. Cash $1,00,000

2. 2018 and 2019 Dividend payment entry would be:

Dr. Retained earnings $1,20,000

Cr. Dividend payable $1,20,000

(At time of declaration of dividend)

Dr. Dividend payable $1,20,000

Cr. Cash $1,20,000

(At time of payment)

3. Entry for purchase of shares in 2020

Dr. New Ltd Shares $1,30,000

Cr. Cash $1,30,000

4. After purchasing shares again in 2020, now Old Ltd. Has significant influence over New Ltd., therefore dividend payment would also be recorded:

Dr. Retained earnings $2,00,000

Cr. Dividend payable $2,00,000

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