Answer:
RTN Industries and Austin Cattle Company
Journal Entries
1. 30% with significant influence:
Jan. 4, 2011: Debit Investment in Austin Cattle Company $648,000
Credit Cash $648,000
To record the cost of the investment by purchasing 20,000 shares or 30% stake in Austin Cattle Company.
December 6, 2011:
Debit Cash $60,000
Credit Investment in Austin $60,000
To record the receipt of dividend.
December 31, 2011:
Debit Investment in Austin Cattle Company $96,000
Credit Investment Income $96,000
To record RTN share of Austin's net income.
2. 10% share:
Jan. 4, 2011: Debit Investment in Austin Cattle Company $648,000
Credit Cash $648,000
To record investment in 10% share of Austin Cattle Company.
Dec. 6, 2011: Debit Cash $60,000
Credit Dividend Income $60,000
To record the receipt of dividend income.
Explanation:
a) Data and Calculations:
Cost of investment in Austin Cattle Company = $648,000
Number of shares held in Austin = 20,000
Percentage of shareholding = 30%
Total number of shares in Austin Cattle = 66,667(20,000/30%)
Austin's reported net income for 2011 = $320,000
RTN share of the net income = $96,000 ($320,000 * 30%)
Analysis:
Investment in Austin Cattle Company $648,000 Cash $648,000
Investment in Austin Cattle Company $96,000 Investment Income $96,000
Cash $60,000 Investment in Austin $60,000
2. If the 20,000 shares represent a 10% interest in the net assets of Austin rather than a 30% interest, the cost method is used:
Analysis:
Investment in Austin Cattle Company $648,000 Cash $648,000
Cash $60,000 Dividend Income $60,000
