Compare alternative methods for recording income. Cooke Company purchased an 80% interest in Hill Company common stock for $360,000 cash on January 1, 20X1. At that time, Hill Company had the following balance sheet:
|
Assets |
Liabilities and Equity |
||
|
Current assets |
$60,000 |
Accounts payable |
$60,000 |
|
Land |
100,000 |
Common stock ($5 par) |
50,000 |
|
Equipment |
350,000 |
Paid in capital in excess of par |
100,000 |
|
Accumulated depreciation |
150,000 |
Retained earnings |
150,000 |
|
Total assets |
$360,000 |
Total liabilities and equity |
$360,000 |
Appraisals indicated that accounts are fairly stated except for the equipment which has a fair value of $225,000 and a remaining life of five years. Any remaining excess is goodwill. Hill Company experienced the following changes in retained earnings during 20X1 and 20X2:
|
Retained earnings, January 1, 20X1 |
$120,000 |
|
|
Net income, 20X1 |
$60,000 |
|
|
Dividends paid in 20X1 |
10,000 |
50,000 |
|
Balance, December 31, 20X1 |
170,000 |
|
|
Net income, 20X2 |
$40,000 |
|
|
Dividends paid in 20X2 |
10,000 |
30,000 |
|
Balance, December 31, 20X2 |
$200,000 |
Prepare a determination and distribution of excess schedule for the investment in Hill Company. Prepare journal entries that Cooke Company would make on its books to record income earned and/or dividends received on its investment in Hill Company during 20X1 and 20X2 under the following methods: simple equity, sophisticated equity, and cost.