Rosco Company purchased 35,000 shares of common stock of Paxton Corporation as a
ID: 2484583 • Letter: R
Question
Rosco Company purchased 35,000 shares of common stock of Paxton Corporation as a long-term investment for $900,000. During the year, Paxton Corporation reported net income o $300,000 and paid dividends of $100,000. Assuming that the 35,000 shares represent a 10% interest in Paxton Corporation: Prepare the journal entry to record the investment in Paxton stock. Prepare any entries that Rosco Company should make in accounting for its investment in Paxton stock during the year. What is the balance of the Stock Investments account on Rosco Company's books at the end of the year? repeat requirement above expect assume that the 35,000 shares represent a 20% interest in paxton corporation.Explanation / Answer
Answer:
(a) When 35,000 share constitute 10% interest in Paxton Corporation;
1. Dr. Investment in shares of Paxton Corporation $ 900,000
Cr. Bank Account $ 900,000
(being 35,000 common shares of Paxton Corporation purchased)
2. Dr. Bank Account $ 10,000
Cr. Dividend Income Received $ 10,000
(being dividend income on common shares of Paxton Corporation)
3. The Balance of the Stock Investment Account on Rosco Company's books at the end of year is $ 900,000.
(b) When 35,000 shares constitute 20% interest in Paxton Corporation;
Assuming that the value $ 900,000 paid for 35,000 shares is equal to their book value, hence no goodwill needs to be accounted for.
1. Dr. Investment in shares of Paxton Corporation $ 900,000
Cr. Bank Account $ 900,000
(being 35,000 common shares of Paxton Corporation purchased)
2.
Dr. Investment in shares of Paxton Corporation $ 60,000
Cr. Investment Income Paxton Corporation $ 60,000
(being 20% of earnings of investee recognised in our books by using equity method)
Dr. Bank Account $ 20,000
Cr. Investment in shares of Paxton Corporation $ 20,000
(being actual dividend received on common shares of Paxton Corporation)
3. The Balance of the Stock Investment Account on Rosco Company's books at the end of year is $ 900,000 + $ 60,000 - $ 20,000 = $ 940,000.
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