Summers Corporation purchased 15,000 shares of Ritchie Corporation common stock for $60 per share on January 2,2012.Ritchie Corporation reported net income of $1,500,000 for 2012 and paid dividends of $300,000 during 2012.Ritchie has a total of 50,000 shares of common stock outstanding.The entry that would be recorded to recognize the income is:

Question

Quizplus · Accepted Answer

The entry should reflect the amount of net income earned by Ritchie Corporation on the investment, which can be calculated as follows: 
15,000 shares/50,000 total shares = 30% ownership 
$1,500,000 net income x 30% ownership = $450,000 
The entry should also reflect the increase in the investment account due to the purchase of the shares. Therefore, the correct entry is:
Investment in Ritchie Corporation 450,000
Income, Ritchie Corporation Investment 450,000

Summers Corporation Purchased 15,000 Shares of Ritchie Corporation Common Stock