Roller Corporation purchased 20 percent ownership of Steam Company on January 1, 20X5, for $70,000. On that date, the book value of Steam's reported net assets was $200,000. The excess over book value paid is attributable to depreciable assets with a remaining useful life of 10 years. Net income and dividend payments of Steam in the following periods were:
Year Net Income Dividends
20X5 $20,000 $5,000
20X6 $40,000 $15,000
20X7 $20,000 $35,000
Prepare journal entries on Roller Corporation's books relating to its investment in Steam Company for each of the three years, assuming it accounts for the investment using (a) the cost method and (b) the equity method.
The full solution is attached.
a) Cost Method
Jan 1, 20X5 DR Investment in Steam Company $70,000
CR Cash $70,000
(Being investment in Steam Co.)
Year 20X5 DR Cash $1,000
CR Dividend Income $1,000
(Being dividend income received)
Year 20X6 DR Cash $3,000
CR Dividend Income $3,000
(Being dividend income ...
This response provides guidelines on how to prepare journal entries using cost and equity methods.