Pager Corporation acquires 30% of the outstanding voting common shares of the Intercomm Corporation for $600,000.Pager Corporation acquires the investment in Intercomm Corporation by buying previously issued shares of Intercomm Corporation from other investors. Suppose that Intercomm Corporation reports earnings of $100,000 and pays dividends of $40,000, during the next accounting period.As a result, Pager Corporation's entries are:

Question

Quizplus · Accepted Answer

The correct entry would be to recognize equity in earnings of affiliate and reduce the investment account accordingly. Since Pager Corporation acquired 30% of the outstanding voting common shares of the Intercomm Corporation, it is entitled to 30% of Intercomm's earnings. Therefore, Equity in Earnings of Affiliate account should be debited for $30,000 (30% of $100,000) and Investment in Stock of Intercomm Corporation account should be credited for $30,000. Additionally, Pager Corporation received $12,000 in dividends from Intercomm Corporation, so Cash account is credited for $12,000, and Investment in Stock of Intercomm Corporation account is debited for an equal amount. Therefore, the correct answer is B.

Pager Corporation Acquires 30% of the Outstanding Voting Common Shares