Example: Equity Method versus Cost Method Pea Corporation created Soup Corporati
ID: 2511402 • Letter: E
Question
Example: Equity Method versus Cost Method Pea Corporation created Soup Corporation with a transfer of $500 cash. During Soup Corp.'s first year of operations, it generated a net loss of $100 and paid no dividends. During Soup Corp.'s second year of operations, it generated net income of $200 and paid dividends of $50. What is the balance in the Investment in Sub account on Parent's books at the end of year 2 using the equity method? What if Parent uses the cost method? What journal entries would Parent make under each method?Explanation / Answer
1. The parent would record the percent of share of invest in its book. Here the parent has 100% investment so full dividend of $ 50 will be recorded in its books and $500 will be recorded in its investment as the parent uses Cost Method.
2. Journal Entries:
By Equity Method ($) ($)
Dr Investment Account 500
Cr Cash Account 500
Dr loss Account 100
Cr Investment Account 100
Dr Investment account 200
Cr Profit Account 200
Dr Cash account 50
Cr Dividend account 50
Cost Method:
Dr Investment Account 500
Cr Cash 500
Dr Cash 50
Cr Dividend 50
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