Question

Bean Corporation purchased 35% of the outstanding shares of common stock of Williams Corporation as a long-term investment. Subsequently, Williams Corporation reported net income and declared and paid cash dividends. What journal entry would Bean Corporation use to record its share of the earnings of Williams Corporation? a. debit Investment in Williams Corporation Stock; credit Cash

b. debit Cash; credit Investment in Williams Corporation
c. debit Cash; credit Dividend Revenue
d. debit Investment in Williams Corporation; credit Investment revenue

Answer 1

Bean Corporation should debit Investment in Williams Corporation and credit Investment Revenue for its share of Williams Corporation's earnings. For dividends received, the journal entry would be a debit to Cash and a credit to Dividend Revenue.

Step-by-step explanation:

To record its share of the earnings from Williams Corporation, Bean Corporation would make the following journal entry: debit Investment in Williams Corporation and credit Investment Revenue. This entry reflects the increase in the value of the investment due to the net income reported by Williams Corporation.

On the other hand, when dividends are declared and paid by Williams Corporation, Bean Corporation should record the receipt of the dividend income with a different journal entry: debit Cash; credit Dividend Revenue. This entry reflects the actual cash inflow from the dividends received based on the common stock ownership percentage.