Errant Inc. purchased 100% of the outstanding voting shares of Grub Inc. for $200,000 on January 1, 2019. On that date, Grub Inc. had common shares and retained earnings worth $100,000 and $60,000, respectively. Goodwill is tested annually for impairment. The balance sheets of both companies, as well as Grub's fair market values on the date of acquisition are disclosed below: Errant Inc. Grub Inc. Grub Inc. (carrying value) (caryying value) (fair value) Cash $ 120 , 000 $ 76 , 000 $ 76 , 000 Accounts Receivable $ 80 , 000 $ 40 , 000 $ 40 , 000 Inventory $ 60 , 000 $ 34 , 000 $ 50 , 000 Equipment (net) $ 400 , 000 $ 80 , 000 $ 70 , 000 Trademark $ 70 , 000 $ 84 , 000 Total Assets $ 660000 $ 300 , 000 Current Liabilities $ 180 , 000 $ 80 , 000 $ 80 , 000 Bonds Payable $ 320 , 000 $ 60 , 000 $ 64 , 000 Common Shares $ 90 , 000 $ 100 , 000 Retained Earnings $ 70 , 000 $ 60 , 000 Total Liabilities and Equity $ 660 , 000 $ 300 , 000 \begin{array}{|l|r|r|r|}\hline & ext { Errant Inc. } & ext { Grub Inc. } & ext { Grub Inc. } \\hline & ext { (carrying value) } & ext { (caryying value) } & ext { (fair value) } \\hline ext { Cash } & \$ 120,000 & \$ 76,000 & \$ 76,000 \\hline ext { Accounts Receivable } & \$ 80,000 & \$ 40,000 & \$ 40,000 \\hline ext { Inventory } & \$ 60,000 & \$ 34,000 & \$ 50,000 \\hline ext { Equipment (net) } & \$ 400,000 & \$ 80,000 & \$ 70,000 \\hline ext { Trademark } & & \$ 70,000 & \$ 84,000 \\hline ext { Total Assets } & \$ 660000 & \$ 300,000 & \\hline ext { Current Liabilities } & \$ 180,000 & \$ 80,000 & \$ 80,000 \\hline ext { Bonds Payable } & \$ 320,000 & \$ 60,000 & \$ 64,000 \\hline ext { Common Shares } & \$ 90,000 & \$ 100,000 & \\hline ext { Retained Earnings } & \$ 70,000 & \$ 60,000 \\hline ext { Total Liabilities and Equity } & \$ 660,000 & \$ 300,000 \\hline\end{array} Cash Accounts Receivable Inventory Equipment (net) Trademark Total Assets Current Liabilities Bonds Payable Common Shares Retained Earnings Total Liabilities and Equity Errant Inc. (carrying value) $120 , 000 $80 , 000 $60 , 000 $400 , 000 $660000 $180 , 000 $320 , 000 $90 , 000 $70 , 000 $660 , 000 Grub Inc. (caryying value) $76 , 000 $40 , 000 $34 , 000 $80 , 000 $70 , 000 $300 , 000 $80 , 000 $60 , 000 $100 , 000 $60 , 000 $300 , 000 Grub Inc. (fair value) $76 , 000 $40 , 000 $50 , 000 $70 , 000 $84 , 000 $80 , 000 $64 , 000 Assume that any difference between the fair values and book values of the equipment, trademark and bonds payable would all be amortized over 10 years.Assuming that Errant uses the cost method, what would be the journal entry to record the dividends received by Errant during the year?A. Debit Credit Cash $ 9 , 000 Investrnent in Grub $ 9 , 000 \begin{array} { | l | r | r | } \hline & ext { Debit } & ext { Credit } \\hline ext { Cash } & \mathbf { \$ 9 , 0 0 0 } & \\hline ext { Investrnent in Grub } & & \mathbf { \$ 9 , 0 0 0 }\\hline\end{array} Cash Investrnent in Grub Debit $9 , 000 Credit $9 , 000 B. Debit Credit Cash $ 9 , 000 Dividend Income $ 9 , 000 \begin{array} { | l | r | r | } \hline & ext { Debit } & ext { Credit } \\hline ext { Cash } & \$ 9,000 & \\hline ext { Dividend Income } & & \$ 9,000 \\hline\end{array} Cash Dividend Income Debit $9 , 000 Credit $9 , 000 C. Debit Credit Cash $ 9 , 000 Acquisition Income $ 9 , 000 \begin{array} { | l | r | r | } \hline & ext { Debit } & ext { Credit } \\hline ext { Cash } & \mathbf { \$ 9 , 0 0 0 } & \\hline ext { Acquisition Income } & & \mathbf { \$9 , 0 0 0 } \\hline\end{array} Cash Acquisition Income Debit $9 , 000 Credit $9 , 000 D.

Question

Errant Inc. purchased 100% of the outstanding voting shares of Grub Inc. for $200,000 on January 1, 2019. On that date, Grub Inc. had common shares and retained earnings worth $100,000 and $60,000, respectively. Goodwill is tested annually for impairment. The balance sheets of both companies, as well as Grub's fair market values on the date of acquisition are disclosed below:  Errant Inc.   Grub Inc.   Grub Inc.   (carrying value)   (caryying value)   (fair value)   Cash  $ 120 , 000 $ 76 , 000 $ 76 , 000  Accounts Receivable  $ 80 , 000 $ 40 , 000 $ 40 , 000  Inventory  $ 60 , 000 $ 34 , 000 $ 50 , 000  Equipment (net)  $ 400 , 000 $ 80 , 000 $ 70 , 000  Trademark  $ 70 , 000 $ 84 , 000  Total Assets  $ 660000 $ 300 , 000  Current Liabilities  $ 180 , 000 $ 80 , 000 $ 80 , 000  Bonds Payable  $ 320 , 000 $ 60 , 000 $ 64 , 000  Common Shares  $ 90 , 000 $ 100 , 000  Retained Earnings  $ 70 , 000 $ 60 , 000  Total Liabilities and Equity  $ 660 , 000 $ 300 , 000 \begin{array}{|l|r|r|r|}\hline  &  	ext { Errant Inc. }  &  	ext { Grub Inc. }  &  	ext { Grub Inc. } \\hline  &  	ext { (carrying value) }  &  	ext { (caryying value) }  &  	ext { (fair value) } \\hline 	ext { Cash }  &  \$ 120,000  &  \$ 76,000  &  \$ 76,000 \\hline 	ext { Accounts Receivable }  &  \$ 80,000  &  \$ 40,000  &  \$ 40,000 \\hline 	ext { Inventory }  &  \$ 60,000  &  \$ 34,000  &  \$ 50,000 \\hline 	ext { Equipment (net) }  &  \$ 400,000  &  \$ 80,000  &  \$ 70,000 \\hline 	ext { Trademark }  &   &  \$ 70,000  &  \$ 84,000 \\hline 	ext { Total Assets }  &  \$ 660000  &  \$ 300,000  &  \\hline 	ext { Current Liabilities }  &  \$ 180,000  &  \$ 80,000  &  \$ 80,000 \\hline 	ext { Bonds Payable }  &  \$ 320,000  &  \$ 60,000  &  \$ 64,000 \\hline 	ext { Common Shares }  &  \$ 90,000  &  \$ 100,000  &  \\hline 	ext { Retained Earnings }  &  \$ 70,000  &  \$ 60,000 \\hline 	ext { Total Liabilities and Equity }  &  \$ 660,000  &  \$ 300,000 \\hline\end{array}  Cash   Accounts Receivable   Inventory   Equipment (net)   Trademark   Total Assets   Current Liabilities   Bonds Payable   Common Shares   Retained Earnings   Total Liabilities and Equity  ​  Errant Inc.   (carrying value)  $120 , 000 $80 , 000 $60 , 000 $400 , 000 $660000 $180 , 000 $320 , 000 $90 , 000 $70 , 000 $660 , 000 ​  Grub Inc.   (caryying value)  $76 , 000 $40 , 000 $34 , 000 $80 , 000 $70 , 000 $300 , 000 $80 , 000 $60 , 000 $100 , 000 $60 , 000 $300 , 000 ​  Grub Inc.   (fair value)  $76 , 000 $40 , 000 $50 , 000 $70 , 000 $84 , 000 $80 , 000 $64 , 000 ​ ​   Assume that any difference between the fair values and book values of the equipment, trademark and bonds payable would all be amortized over 10 years.Assuming that Errant uses the cost method, what would be the journal entry to record the dividends received by Errant during the year?A.  Debit   Credit   Cash  $ 9 , 000  Investrnent in Grub  $ 9 , 000 \begin{array} { | l | r | r | } \hline  &  	ext { Debit }  &  	ext { Credit } \\hline 	ext { Cash }  &  \mathbf { \$ 9 , 0 0 0 }  &  \\hline 	ext { Investrnent in Grub }  &   &   \mathbf { \$ 9 , 0 0 0 }\\hline\end{array}  Cash   Investrnent in Grub  ​  Debit  $9 , 000 ​  Credit  $9 , 000 ​ ​ B.  Debit   Credit   Cash  $ 9 , 000  Dividend Income  $ 9 , 000 \begin{array} { | l | r | r | } \hline  &  	ext { Debit }  &  	ext { Credit } \\hline 	ext { Cash }  &  \$ 9,000  & \\hline 	ext { Dividend Income }  &   &  \$ 9,000  \\hline\end{array}  Cash   Dividend Income  ​  Debit  $9 , 000 ​  Credit  $9 , 000 ​ ​ C.  Debit   Credit   Cash  $ 9 , 000  Acquisition Income  $ 9 , 000 \begin{array} { | l | r | r | } \hline  &  	ext { Debit }  &  	ext { Credit } \\hline 	ext { Cash }  &  \mathbf { \$ 9 , 0 0 0 }  &  \\hline 	ext { Acquisition Income }  &   &  \mathbf { \$9 , 0 0 0 } \\hline\end{array}  Cash   Acquisition Income  ​  Debit  $9 , 000 ​  Credit  $9 , 000 ​ ​ D.

JAMECIA BATISTE · Accepted Answer

Final Answer :  The correct answer is B.When a parent company (Errant Inc.) receives dividends from its subsidiary (Grub Inc.), under the cost method, the entry to record the receipt of dividends is a debit to Cash and a credit to Dividend Income. This is because the investment in the subsidiary is recorded at cost and is not adjusted for the subsidiary's earnings or dividends. Dividends received are considered income to the parent company.Therefore, the journal entry to record the dividends received by Errant during the year would be: Debit Credit Cash $ 9 , 000 Dividend Income $ 9 , 000 \begin{array}{|l|r|r|}\hline &  	ext{Debit}  &  	ext{Credit} \\hline	ext{Cash}  &  \$9,000  &  \\hline	ext{Dividend Income}  &   &  \$9,000 \\hline\end{array} Cash Dividend Income ​ Debit $9 , 000 ​ Credit $9 , 000 ​ ​ This entry increases the Cash account and recognizes Dividend Income for Errant Inc. The amount of $9,000 is assumed to be the dividend received, as it is the figure provided in the answer options. However, the actual amount of the dividend received is not specified in the question. If the actual dividend amount were different, the numbers in the journal entry would need to be adjusted accordingly.

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