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On January 1st, 2018, LSU Inc. purchased 25,000 of the 100,000 common shares of Blizzard Co....

On January 1st, 2018, LSU Inc. purchased 25,000 of the 100,000 common shares of Blizzard Co. for $14 per share. Blizzard declared a dividend of $30,000 on June 30th, 2018. On Dec. 31, 2018, Blizzard reported net income of $400,000 and the fair market value of its stock at that point in time was $18 per share. Prepare all necessary journal entries relating to this investment for LSU Inc., Please show all work.

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Answer #1

Ans:

Purchased 25,000 shares

Total Stock : 100,000

Purchase % = 25%

Purchase price : 25,000 *14 = $350,000

So between 20-50% of stock purchase equity method is to be applied.

Proportion of dividend earned : $30,000 * 25% = $7,500

Proportion of net profit earned : $400,000 * 25% = $100,000

Required Journal entries are :

Date Account Title Debit Credit
January 1, 2018 Investment $350,000
Cash $350,000
June 30 Cash $7,500

Investment

(To report the receipt of Dividend)

$7,500
Dec 31 Investment $100,000

Retained Earnings

(To report the net income earned by subsidiary)

$100,000

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