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On 01/01/2013, Yaro Company owns 30% of the common stock of Dew Co. with $450,000 cash...

On 01/01/2013, Yaro Company owns 30% of the common stock of Dew Co. with $450,000 cash and 10,000 shares ($1 face value and $15 market value) that are issued acquire the Dew’s shares. Assume that Yaro gain significance influence over Dew.

What counting method should Yaro use to record its investment? What are the journal entries for Yaro and Dew to document the investing decision on 01/01/2013 respectively?

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Answer #1

When the investing company gains significant influence over the investee company, it used equity method to record the transactions related to its investment. Therefore, Yaro should use equity method to record its investment.

Yaro will prepare the following journal entry to document the investment on 01/01/2013:

Date Account Titles Debit Credit
01/01/2013 Investment in Affiliate [$450,000 + (10,000 x $15)] 600,000
      Cash 450,000
      Common Stock (10,000 x $1) 10,000
      Paid-in Capital in Excess of Par Value - Common [10,000 x ($15 - $1)] 140,000

Dew need not make any journal entry to document this investment decision because Yaro would have purchased the ownership in Dew from its Dew's shareholders and not from Dew company itself. Therefore, Dew will make no journal entry.

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