Roller Corporation purchased 100 percent ownership of Steam

Roller Corporation purchased 100 percent ownership of Steam Company on January 1, 20X5, for $284,000. On that date, the book value of Steam’s reported net assets was $216,000. The excess over book value paid is attributable to depreciable assets with a remaining useful life of 5 years. Net income and dividend payments of Steam in the following periods were:

Year Net Income Dividends  
20X5 $31,000 $6,000

20X6 51,000 16,000

20X7 31,000 52,000

Prepare journal entries on Roller Corporation’s books relating to its investment in Steam Company for each of the three years, assuming it accounts for the investment using the cost method

(1a) Record the purchase of Steam Company stock for 20X5.

(1b) Record the dividend income from Steam Company for 20X5.

(2) Record the dividend income from Steam Company for 20X6.

(3) Record the dividend income from Steam Company for 20X7.

Solution

Event. General journal.                 Debit.    Credit

1a).    Investment in steam       2,84,000
           Company stock.                               

           To cash                                              2,84,000

1b).    Cash                                       6,000
           To Dividend income.                             6,000

2).     Cash                                     16,000
           To Dividend income.                           16,000

3).     Cash                                     52,000
           To Dividend income.                           52,000