Hamilton Company owns 51,600 of Hennie Company's 120,000 outstanding shares of common stock. Hennie Company pays $33,000 in total cash dividends to its shareholders. Hamilton's entry to record this transaction should include a:
(51,600/120,000)x33000=14190
To determine Hamilton's entry to record the cash dividends paid by Hennie Company, we need to understand the ownership percentage that Hamilton holds in Hennie Company and the type of accounting method used by Hamilton.
1. Ownership Percentage: Hamilton owns 51,600 out of 120,000 outstanding shares of common stock. To find the ownership percentage, we can divide the number of shares owned by Hamilton by the total number of outstanding shares:
Ownership Percentage = (Shares owned by Hamilton / Total outstanding shares) * 100
Ownership Percentage = (51,600 / 120,000) * 100
Ownership Percentage = 43%
Therefore, Hamilton Company owns a 43% stake in Hennie Company.
2. Accounting Method: There are two accounting methods generally used to account for investments in equity securities - the equity method and the fair value method. Usually, the equity method is used when an investor holds significant influence, which is generally considered to be ownership of 20% or more of the investee company's voting stock.
Since Hamilton owns 43% of Hennie Company's outstanding shares, it surpasses the significant influence threshold of 20%. Therefore, we can assume that Hamilton uses the equity method to account for its investment in Hennie Company.
Based on the equity method, the investor recognizes its proportionate share of dividends as a return on investment. The entry to record this transaction would be as follows:
Debit: Investment in Hennie Company (equity account)
Credit: Dividend Income (income statement account)
The specific amounts would depend on the total dividends paid by Hennie Company and Hamilton's ownership percentage. However, without additional information on Hamilton's ownership percentage of Hennie Company, it is difficult to determine the exact dollar amounts for the debit and credit.