Question

Situation 1 Bridgeport Cosmetics acquired 10% of the 184,000 shares of common stock of Martinez Fashion at a total cost of $13 per share on March 18, 2020. On June 30, Martinez declared and paid $69,400 cash dividend to all stockholders. On December 31, Martinez reported net income of $113,000 for the year. At December 31, the market price of Martinez Fashion was $14 per share.

Situation 2 Indigo, Inc. obtained significant influence over Seles Corporation by buying 30% of Seles’s 31,400 outstanding shares of common stock at a total cost of $9 per share on January 1, 2020. On June 15, Seles declared and paid cash dividends of $39,100 to all stockholders. On December 31, Seles reported a net income of $85,000 for the year.

Required:

1. Prepare all necessary journal entries in 2020 for both situations.

Answer 1

Please see find the answer in the explanation!

Step-by-step explanation:

Situation 1:

First entry:

Bridgeport acquired 10% of shares of Martinez Fashion, the double entry would reduce the cash of Bridgeport and increase the asset, see as follows:

Shares Dr $239200 (18400× $13)

Cash Cr $239200

On June 30, Martinez declared and paid $69400 cash to all stockholders, Bridgeport will be entitled to 10% of the declared and paid dividend, therefore, dividend income will have to be recorded as follows:

Cash/bank Dr $6940

Dividend Income Cr $6940

Situation 2:

Indigo Inc obtained significant influence over Seles corporation (making her an Associate). In a group situation, an associate is equity accounted and is recorded as an investment in the statement of financial position and is also entitled to the profits with the proportion of their ownership. First entry would be to record the associate as an investment, see as follows:

Investment in Associate Dr $84780

Bank/Cash Cr $84780

On june 15 Seles declared and paid cash dividend, Indigo Inc will be entitled to 30% of the dividend, see as follows:

Dividend income= $39100× 30%

Dividend income= $11730

Entry:

Cash/Bank Dr $11730

Dividend income Cr $11730

Unlike Bridgeport Corporation, Indigo Inc will be entitled to 30% of the reported net income as well. The entry is as follows;

Cash/Bank Dr $ 25500 ($85000× 30%)

Income Cr $ 25500