Question

Waterway Company owns 30% interest in the stock of Pharoah Corporation. During the year, Pharoah pays $21000 in dividends to Waterway, and reports $315000 in net income. Waterway Company’s investment in Pharoah will increase Waterways net income by

Answer 1

net income increases by $94,500

Step-by-step explanation:

The journal records to record this transaction should be:

Dr Cash 21,000

Cr Investment in Pharoah Corporation 21,000

Dr Investment in Pharoah Corporation 94,500 (= $315,000 x 30%)

Cr Revenue from Pharoah investment 94,500

When a company uses the equity method, dividends are not considered income, they actually the investment account. Revenue is recognized only when the corporation generates a positive net income.