Asked by Adriana PreciousLatina on Jun 13, 2024
Verified
Errant Inc. purchased 100% of the outstanding voting shares of Grub Inc. for $200,000 on January 1, 2019. On that date, Grub Inc. had common shares and retained earnings worth $100,000 and $60,000, respectively. Goodwill is tested annually for impairment. The balance sheets of both companies, as well as Grub's fair market values on the date of acquisition are disclosed below:
Errant Inc. Grub Inc. Grub Inc. (carrying value) (caryying value) (fair value) Cash $120,000$76,000$76,000 Accounts Receivable $80,000$40,000$40,000 Inventory $60,000$34,000$50,000 Equipment (net) $400,000$80,000$70,000 Trademark $70,000$84,000 Total Assets $660000$300,000 Current Liabilities $180,000$80,000$80,000 Bonds Payable $320,000$60,000$64,000 Common Shares $90,000$100,000 Retained Earnings $70,000$60,000 Total Liabilities and Equity $660,000$300,000\begin{array}{|l|r|r|r|}\hline & \text { Errant Inc. } & \text { Grub Inc. } & \text { Grub Inc. } \\\hline & \text { (carrying value) } & \text { (caryying value) } & \text { (fair value) } \\\hline \text { Cash } & \$ 120,000 & \$ 76,000 & \$ 76,000 \\\hline \text { Accounts Receivable } & \$ 80,000 & \$ 40,000 & \$ 40,000 \\\hline \text { Inventory } & \$ 60,000 & \$ 34,000 & \$ 50,000 \\\hline \text { Equipment (net) } & \$ 400,000 & \$ 80,000 & \$ 70,000 \\\hline \text { Trademark } & & \$ 70,000 & \$ 84,000 \\\hline \text { Total Assets } & \$ 660000 & \$ 300,000 & \\\hline \text { Current Liabilities } & \$ 180,000 & \$ 80,000 & \$ 80,000 \\\hline \text { Bonds Payable } & \$ 320,000 & \$ 60,000 & \$ 64,000 \\\hline \text { Common Shares } & \$ 90,000 & \$ 100,000 & \\\hline \text { Retained Earnings } & \$ 70,000 & \$ 60,000 \\\hline \text { Total Liabilities and Equity } & \$ 660,000 & \$ 300,000 \\\hline\end{array} Cash Accounts Receivable Inventory Equipment (net) Trademark Total Assets Current Liabilities Bonds Payable Common Shares Retained Earnings Total Liabilities and Equity Errant Inc. (carrying value) $120,000$80,000$60,000$400,000$660000$180,000$320,000$90,000$70,000$660,000 Grub Inc. (caryying value) $76,000$40,000$34,000$80,000$70,000$300,000$80,000$60,000$100,000$60,000$300,000 Grub Inc. (fair value) $76,000$40,000$50,000$70,000$84,000$80,000$64,000 Assume that any difference between the fair values and book values of the equipment, trademark and bonds payable would all be amortized over 10 years.
Assuming that Errant uses the cost method, what would be the journal entry to record the dividends received by Errant during the year?
A.
Debit Credit Cash $9,000 Investrnent in Grub $9,000\begin{array} { | l | r | r | } \hline & \text { Debit } & \text { Credit } \\\hline \text { Cash } & \mathbf { \$ 9 , 0 0 0 } & \\\hline \text { Investrnent in Grub } & & \mathbf { \$ 9 , 0 0 0 }\\\hline\end{array} Cash Investrnent in Grub Debit $9,000 Credit $9,000
B.
Debit Credit Cash $9,000 Dividend Income $9,000\begin{array} { | l | r | r | } \hline & \text { Debit } & \text { Credit } \\\hline \text { Cash } & \$ 9,000 &\\\hline \text { Dividend Income } & & \$ 9,000 \\\hline\end{array} Cash Dividend Income Debit $9,000 Credit $9,000
C.
Debit Credit Cash $9,000 Acquisition Income $9,000\begin{array} { | l | r | r | } \hline & \text { Debit } & \text { Credit } \\\hline \text { Cash } & \mathbf { \$ 9 , 0 0 0 } & \\\hline \text { Acquisition Income } & & \mathbf { \$9 , 0 0 0 } \\\hline\end{array} Cash Acquisition Income Debit $9,000 Credit $9,000
D.
Cost Method
An accounting method used to record investments in which the investment is recorded at cost and dividends are recognized as income.
Dividends
Dividends are payments made by a corporation to its shareholder members, distributing a portion of the company's earnings.
Investment in Grub
The act of putting money into Grub (assuming Grub is a specific entity or company), expecting future financial returns.
- Highlight the distinctions between using cost and equity approaches in investment accounting.
Verified Answer
JB
JAMECIA BATISTEJun 20, 2024
Final Answer :
The correct answer is B.
When a parent company (Errant Inc.) receives dividends from its subsidiary (Grub Inc.), under the cost method, the entry to record the receipt of dividends is a debit to Cash and a credit to Dividend Income. This is because the investment in the subsidiary is recorded at cost and is not adjusted for the subsidiary's earnings or dividends. Dividends received are considered income to the parent company.
Therefore, the journal entry to record the dividends received by Errant during the year would be:
DebitCreditCash$9,000Dividend Income$9,000\begin{array}{|l|r|r|}\hline& \text{Debit} & \text{Credit} \\\hline\text{Cash} & \$9,000 & \\\hline\text{Dividend Income} & & \$9,000 \\\hline\end{array}CashDividend IncomeDebit$9,000Credit$9,000
This entry increases the Cash account and recognizes Dividend Income for Errant Inc. The amount of $9,000 is assumed to be the dividend received, as it is the figure provided in the answer options. However, the actual amount of the dividend received is not specified in the question. If the actual dividend amount were different, the numbers in the journal entry would need to be adjusted accordingly.
When a parent company (Errant Inc.) receives dividends from its subsidiary (Grub Inc.), under the cost method, the entry to record the receipt of dividends is a debit to Cash and a credit to Dividend Income. This is because the investment in the subsidiary is recorded at cost and is not adjusted for the subsidiary's earnings or dividends. Dividends received are considered income to the parent company.
Therefore, the journal entry to record the dividends received by Errant during the year would be:
DebitCreditCash$9,000Dividend Income$9,000\begin{array}{|l|r|r|}\hline& \text{Debit} & \text{Credit} \\\hline\text{Cash} & \$9,000 & \\\hline\text{Dividend Income} & & \$9,000 \\\hline\end{array}CashDividend IncomeDebit$9,000Credit$9,000
This entry increases the Cash account and recognizes Dividend Income for Errant Inc. The amount of $9,000 is assumed to be the dividend received, as it is the figure provided in the answer options. However, the actual amount of the dividend received is not specified in the question. If the actual dividend amount were different, the numbers in the journal entry would need to be adjusted accordingly.
Learning Objectives
- Highlight the distinctions between using cost and equity approaches in investment accounting.