Asked by Viviana Paola on Jul 08, 2024
Verified
On December 31,2019,Jean World Corporation recorded the following journal entry relating to its investment in 9,000 shares of common stock of Soda Corporation.
At the end of 2019,Soda Corporation reported net income of $120,000.
Earlier in the year,Soda declared and paid dividends of $18,000.
A.What method is being used to account for this investment?
B.What is the total number of shares outstanding of Soda's common stock?
Equity Method
The equity method is an accounting technique used to record investments in associate companies where the investor has significant influence but not full control.
Common Stock
A type of equity security that represents ownership in a corporation, with holders having a claim on the company's assets and earnings.
Net Income
The total earnings of a company after subtracting all expenses from its total revenues.
- Execute the equity method in the management of accounts for prolonged investments.
- Understand the consequences of owning shares in another corporation's voting equity.
Verified Answer
B.$120,000 × Percentage of Soda stock held by Jean World = $54,000.
Percentage of Soda stock held by Jean World = 45%.
Total number of Soda shares outstanding times 45% = 9,000 shares.
Total number of Soda shares outstanding = 20,000.
Learning Objectives
- Execute the equity method in the management of accounts for prolonged investments.
- Understand the consequences of owning shares in another corporation's voting equity.
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