Question

Perry Investments bought 2,000 shares of Able, Inc. common stock on January 1, 20X1, for $20,000 and 2,000 shares of Baker, Inc. common stock on July 1, 20X1 for $24,000. Baker paid $2,400 of previously declared dividends to Perry on December 31, 20X1. At the end of 20X1, the fair value of the Able stock was $18,000 and the fair value of the Baker stock was $28,000. The stocks were purchased for short-term speculation prior to the effective date of the change in accounting rules for equity investments. Perry owns 10% of each company.
Perry should record the receipt of the Baker dividend as:______

a. DR Cash 2,400 CR Investment in Baker 2,400
b. DR Cash 240 CR Dividend income 240
c. DR Cash 2,400 CR Dividends receivable 2,400
d. DR Dividends receivable 2,400 CR Dividend income 2,400

Answer 1

Answer:

Perry Investments

Perry should record the receipt of the Baker dividend as:______

c. DR Cash 2,400 CR Dividends receivable 2,400

Explanation:

a) Data and Calculations:

Investment in Able, Inc common stock = 2,000 on January 1, 20X1, at a cost of $20,000; December 31, 20X1 fair value = $18,000

Investment in Baker, Inc. common stock  = 2,000 on July 1, 20X1, at a cost of $24,000; December 31, 20X1 fair value = $28,000.

Baker's previously declared dividends on December 31, 20X1 = $2,400

b) Since Baker declared the dividends previously, Perry must have debited its Dividends Receivable account.  Now that payment had been made by Baker, the Dividends Receivable will be credited while the Cash account is debited.