Question

(Equity Method) On January 1, 2017, Pennington Corporation purchased 30% of the common shares of Edwards

Company for \(180,000. During the year, Edwards earned a net income of \)80,000 and paid dividends of $20,000.

Instructions

Prepare the entries for Pennington to record the purchase and any additional entries related to this investment in Edwards Company

in 2017.

Short answer

Equity investment is debited by $180,000 and cash credited by $180,000. Cash debited by $6,000 and dividend revenue credited by $6,000. Equity investment debited by $24,000 and revenue from investment credited by $24,000.

Step-by-step solution

Definition of equity method

According to this method Income from investment is calculated according to the net income of the company.

Journal entries regarding equity investment

Date	Particulars	Debit	Credit
January 1, 2017	Equity Investment	$180,000
	Cash		$180,000
	(Entry for the purchase of outstanding common stock)
December 31, 2017	Cash ($20,000 * 30%)	$6,000
	Dividend Revenue		6,000
	(Entry of dividend received on shares)
December 31, 2018	Equity Investment ($80,000 * 30%)	$24,000
	Revenue from Investment		$24,000
	(Entry for the recording of income from investment)