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Draft Co. purchased 14,000 shares of Hamburg Corporation's 40,000 shares of common stock on January 1....

Draft Co. purchased 14,000 shares of Hamburg Corporation's 40,000 shares of common stock on January 1. This represented 35% of Hamburg's outstanding shares and gave Draft Co. significant influence over Hamburg's management and operations. On October 11, Hamburg declared and paid cash dividends of $30,000. On December 31, Hamburg reported net income of $125,000 for the year. Prepare the journal entries Draft Co. should record to account for the dividends received and the earnings reported by Hamburg Corporation.

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Answer #2

Journal Entries:

Date Account title and Explanation Debit Credit
October 11 Cash [$30,000 x 35%] $10,500
Equity investment in Hamburg Corporation $10,500
[To record dividend received from Hamburg Corporation]
December 31 Equity investment in Hamburg Corporation $43,750
Equity income [$125,000 x 35%] $43,750
[To record equity income from Hamburg Corporation]

*Method Used: Equity method because Draft Co. holding 35% and has significant influence

answered by: anonymous
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