Question

On January 1, 2018, Alamar Corporation acquired a 39 percent interest in Burks, Inc., for $228,000. On that date, Burks's balance sheet disclosed net assets with both a fair and book value of $327,000. During 2018, Burks reported net income of $79,000 and declared and paid cash dividends of $29,000. Alamar sold inventory costing $26,000 to Burks during 2018 for $42,000. Burks used all of this merchandise in its operations during 2018. Prepare all of Alamar's 2018 journal entries to apply the equity method to this investment.

Answer 1

Date Account Title Debit Credit

Jan 1, 2018 Investment in Burks, Inc $228,000

Cash $228,000

Date Account Title Debit Credit

Dec. 31, 2018 Investment in Burks, Inc $30,180

Revenue from investment $30,180

Working:

= Net income of Burks * Ownership percentage

= 79,000 * 39%

= $30,180

Date Account Title Debit Credit

Dec. 31, 2018 Dividend receivable $11,310

Investment in Burks, Inc $11,310

Working

= Dividends declared * Ownership percentage

= 29,000 * 39%

= $11,310

Date Account Title Debit Credit

Jan 1, 2018 Cash $11,310

Dividend Receivable $11,310