Question

Assume that Horicon Corp acquired 25% of the common stock of Sheboygan Corp. on January 1 for $300,000. During the year Sheboygan Corp. reported net income of $160,000 and paid total dividends of $60,000. What entry would Horicon make to record the receipt of the dividend from Sheboygan

Answer 1

Answer:

Cash $60,000 (debit)

Investment Income $60,000 (credit)

Explanation:

It is Important to note that the Acquirer (Horicon Corp) is a Corporate.

The Acquisition of 25% of the common stock of Sheboygan Corp constitute an Asset for Horicon Corp since Economic Benefits are expected to be received from the Investment.

The Receipt of Dividends from these shares will constitute Investment Income and the entry is as follows :

Cash $60,000 (debit)

Investment Income $60,000 (credit)

Answer 2

Answer:

Dr Cash 15,000

    Cr Investment in Sheboygan Corp 15,000

Explanation:

If Horicon Corp uses the equity method to record its investment, the original journal entry should have been:

January 1, purchase of 25% of common stock

Dr Investment in Sheboygan Corp 300,000

    Cr Cash 300,000

Then it must record the increase in the investment:

XX, increase in investment asset (25% x $160,000)

Dr Investment in Sheboygan Corp 40,000

    Cr Investment revenue 40,000

Finally when dividends are distributed:

YY, distribution of dividends (25% x $60,000)

Dr Cash 15,000

    Cr Investment in Sheboygan Corp 15,000