On January 2, Todd Company acquired 40% of the outstanding stock of McGuire Company for $205,000. For the year ending, December 31, McGuire earned income of $48,000 and paid dividends of $14,000.
Prepare the entries for Todd Company for the purchase of the stock, share of McGuire income and dividends received from McGuire.
1. Entry for the purchase of the stock:
Date: January 2
Account Titles: Investment in McGuire Company (debit), Cash (credit)
Amounts: $205,000
2. Entry for Todd Company's share of McGuire income:
Date: December 31
Account Titles: Investment in McGuire Company (debit), Equity in Earnings of McGuire Company (credit)
Amounts: $19,200 (40% * $48,000)
3. Entry for dividends received from McGuire:
Date: December 31
Account Titles: Cash (debit), Investment in McGuire Company (credit)
Amounts: $5,600 (40% * $14,000)
To prepare the entries for Todd Company, we will need to account for the purchase of the stock, its share of McGuire's income, and the dividends received from McGuire.
1. Purchase of Stock:
When Todd Company acquired 40% of the outstanding stock of McGuire for $205,000, it needs to record the investment on its books. Here's the entry:
Date: January 2
Investment in McGuire Company (Asset) $205,000
Cash (Asset) $205,000
This entry reflects an increase in Todd Company's Investment in McGuire Company and a decrease in its Cash account.
2. Share of McGuire's Income:
As Todd Company owns 40% of McGuire's outstanding stock, it is entitled to 40% of McGuire's income. Here's the entry:
Date: December 31 (year-end)
Investment in McGuire Company (Asset) $19,200 (40% of $48,000)
Income from McGuire Company (Revenue) $19,200
This entry recognizes Todd Company's share of McGuire's income as a revenue, which increases its Investment in McGuire Company.
3. Dividends Received from McGuire:
If McGuire paid dividends of $14,000, Todd Company will record this as a reduction in its Investment in McGuire Company. Here's the entry:
Date: December 31 (year-end)
Cash (Asset) $5,600 (40% of $14,000)
Investment in McGuire Company (Asset) $5,600
This entry reflects an increase in Todd Company's Cash account and a decrease in its Investment in McGuire Company.
Please note that these entries assume Todd Company accounts for its investment in McGuire using the equity method. Make sure to consult with an accounting professional to ensure accurate recording of transactions.