Winters Corporation purchased 15,000 shares of Poores Corporation common stock for $60 per share on January 2,2014.Poores Corporation reported net income of $1,500,000 for 2014 and paid dividends of $300,000 during 2014.Poores 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 investment in Poores Corporation needs to be adjusted for both the net income and dividends received. The net income of $1,500,000 represents earnings for the year, which would increase the value of the investment by $450,000 ([$1,500,000 net income ÷ 50,000 shares] × 15,000 shares). The dividends paid of $300,000 represent a return of investment, which would decrease the value of the investment by $300,000. Therefore, the entry to recognize the income would be to debit Investment in Poores Corporation for $450,000 ([$1,500,000 net income ÷ 50,000 shares] × 15,000 shares) and credit Income, Poores Corporation Investment for $450,000 (the portion of the investment income earned during the current year).

Winters Corporation Purchased 15,000 Shares of Poores Corporation Common Stock