Pike Corporation paid $100,000 for a 10% interest in Salmon Corp. on January 1, 2010, when
Salmon's stockholders' equity consisted of $800,000 of $10 par value common stock and
$200,000 retained earnings. On December 31, 2011, after receipt of the year's dividends
from Salmon, Pike paid $192,000 for an additional 20% interest in Salmon Corp. Both of
Pike's investments were made when Salmon's book values equaled their fair values.
Salmon's net income and dividends for 2010 and 2011 were as follows:
Net income in 31/12/2010 = $60,000 and in 31/12/2011 = $140,000
Dividends in 31/12/2010 = $20,000 and in 31/12/2011 = $40,000
Required:
1. Prepare journal entries for Pike Corporation to account for its investment in Salmon
Corporation for 2010 and 2011.
2. Calculate the balance of Pike's investment in Salmon at December 31, 2011.
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What be the answers?
To prepare the journal entries for Pike Corporation's investment in Salmon Corporation for 2010 and 2011, we need to consider the initial investment and subsequent investment, as well as the net income and dividends received.
1. Journal Entries for 2010:
a) Initial Investment:
Pike Corporation's investment in Salmon Corporation:
Debit Investment in Salmon Corporation: $100,000
Credit Cash: $100,000
b) Share of Net Income:
Pike Corporation's share of Salmon Corporation's net income:
Debit Investment in Salmon Corporation: $6,000 (10% of $60,000)
Credit Investment Income: $6,000
c) Share of Dividends Received:
Pike Corporation's share of dividends received from Salmon Corporation:
Debit Cash: $2,000 (10% of $20,000)
Credit Investment in Salmon Corporation: $2,000
2. Journal Entries for 2011:
a) Subsequent Investment:
Pike Corporation's additional investment in Salmon Corporation:
Debit Investment in Salmon Corporation: $192,000
Credit Cash: $192,000
b) Share of Net Income:
Pike Corporation's share of Salmon Corporation's net income:
Debit Investment in Salmon Corporation: $28,000 (20% of $140,000)
Credit Investment Income: $28,000
c) Share of Dividends Received:
Pike Corporation's share of dividends received from Salmon Corporation:
Debit Cash: $8,000 (20% of $40,000)
Credit Investment in Salmon Corporation: $8,000
Note: The journal entries represent the increase/decrease in the investment account and the corresponding increase/decrease in the cash or income account.
2. Calculation of Balance of Pike's Investment in Salmon at December 31, 2011:
To calculate the balance of Pike's investment in Salmon at December 31, 2011, we need to consider the initial investment, subsequent investment, net income, and dividends.
Initial investment:
$100,000
Subsequent investment:
$192,000
Share of Net Income:
2010: $6,000
2011: $28,000
Share of Dividends:
2010: $2,000
2011: $8,000
Balance of Pike's investment in Salmon at December 31, 2011:
Initial investment + Subsequent investment + Share of Net Income - Share of Dividends
= $100,000 + $192,000 + $6,000 + $28,000 - $2,000 - $8,000
= $316,000
Therefore, the balance of Pike's investment in Salmon at December 31, 2011, is $316,000.