Alico Inc. manufactures high precision small parts for the medical industry and

Question

Alico Inc. manufactures high precision small parts for the medical industry and relies heavily on another company, Domco Inc., to provide some of its more complex machined parts. In order to assure the supply of these parts Alico Inc.. has decided to take substantial control but not absolute control of Domco Inc. by buying 38% of Domco Inc.’s outstanding shares of common stock. On 5/2/2016 Domco Inc.had 500,000 shares of outstanding common stock. On that date Alico Inc. purchased enough of the outstanding shares of Domco Inc.’s common stock at $12 dollars per share to hold a 38% share of the company.

            On 10/31/2016 Alico Inc. received a dividend check in the amount $48,000 from Domco Inc. On 12/31/2016 Domcon Inc. reported a net income of $1,500,000.

            Required:

            Make all of the required entries from the information above.

Explanation / Answer

Journal Entries:

Total Investment = 500,000 x 38% = 190,000 x 12 = $2,280,000

Date Account Title Debit Credit 5/2/2016 Investment in Domco Inc. 2,280,000 Cash 2,280,000 10/31/2016 Cash 48,000 Investment in Domco Inc. 48,000 12/31/2016 Investment in Domco Inc. 570,000 Equity in Domco Inc. Income 570,000 (1,500,000 x 38%)

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