1 Madison Corporation purchased 40 of Jay Corporation for 46

1/ Madison Corporation purchased 40% of Jay Corporation for $460,000 on January 1. On June 20 of the same year, Jay Corporation declared total cash dividends of $115,000. At year-end, Jay Corporation reported net income of $575,000. The balance in Madison Corporation\'s Long-Term Investment-Jay Corporation account as of December 31 should be:

Multiple Choice

$736,000.

$644,000.

$851,000.

$276,000.

$460,000.

2/ McVeigh Corp. owns 40% of Gondor Company\'s common stock. McVeigh received $61,600 in cash dividends from Gondor. The entry to record this transaction should include a:

Multiple Choice

Debit to Dividends for $154,000.

Credit to Long-Term Investments for $61,600.

Debit to Dividend Revenue for $61,600.

Credit to Long-Term Investments for $154,000.

Credit to Cash for $61,600.

Solution

Answer to Part 1

Value of Investment

460000

Less: Pre Acquisition Dividend (115000*40%)

-46000

Add: Share of Net Income (575000*40%)

230000

Balance of Long term Investment

644000

* We have to reduce the amount of pre acquisition dividend from the value of investments.

** As we are holding 40% of share capital, we have to follow the equity method and share of net income shall be added to value of investment.

Therefore, the right answer is option (b) $ 644000.

Answer to part 2

As Mc Veigh corp is holding 40% of share capital, the amount of dividend received will be shown as reduction from the value of investment. That means, Investments will have debit balance and any reduction of investment will be recorded as crediting the investment account.

Therefore, the right answer is option (b) Credit to long term investments for $ 61600