. Oregon Company, a paper products manufacturer, wishes to enter the Canadian ma
ID: 2601453 • Letter: #
Question
. Oregon Company, a paper products manufacturer, wishes to enter the Canadian market. The company purchased 30 percent of the outstanding stock of Canadian Paper Inc. on January 1, Year One, for $6,000,000. The CEO of Oregon will sit on the board of directors of Canadian, and other evidence of significant influence does exist.
a. Canadian reported net income of $760,000 for the year. Record the journal entry (if any) to be
prepared by Oregon.
b. Canadian paid a cash dividend of $80,000. Record the journal entry for Oregon.
c. What amount would Oregon report on its balance sheet as its investment in Canadian as of the
end of Year One?
Explanation / Answer
(a)
Reporting of net income requires an entry in the books of Canadian but not Oregon because it is the earnings as calculated in the Canadian's books and is not ditributed to stockholders.
(b)
Candian paid a cash dividend of $80000 and Oregon has 30% stake in the company so it receives 30%*80000 = $24000
Bank 24000
Dividend received 24000
(c)
Investors do not treat dividends as revenue under the equity method. They subtract the dividend amount from the investment carrying value. Value of the investment is decreased by the cash distribution. Since the investor immediately records this effect on its balance sheet, it would also count it as revenue and the amount taken in balance sheet by Oregon will be 5,976,000.
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