Question

On January 2, 20X5, Patriot purchased 80 percent of Jags Inc.'s outstanding common shares for $800,000. Jag reported net income of $310,000 for 20X5, and paid dividends of $100,000. What are all the cost method adjustments?

Answer 1

Patriot Company

The cost method adjustments are:

Debit Cash $80,000

Credit Dividends Revenue $80,000

To record the dividends received from Jags Inc.

Step-by-step explanation:

a) Data and Calculations:

Investment in Jags Inc. = 80%

Jag's outstanding common shares = $800,000

Net income for 20X5 = $310,000

Dividends paid = $100,000

Cost of investment in Jags = $640,000

Cost method adjustments:

Cash $80,000 Dividends Revenue $80,000 ($100,000 * 80%)

b) With the 80% shareholding in Jags Inc., the investment is supposed to be accounted for using the equity method and not the cost method, and the accounts of the two companies should be consolidated. However, using the cost method leaves the investment at cost (or purchase price) in the balance sheet, while adjustments are made for dividends revenue.