directly from one of the founders for a price of $44 per share. Hi Energy has 400,000 shares outstanding, including the Penman shares. On July 2, 2014, Hi Energy paid $440,000 in total dividends to its shareholders. On December 31, 2014, Hi Energy reported a net income of $800,000 for the year. Penman uses the equity method in accounting for its investment in Hi Energy.
a. Provide the Penman Inc. journal entries for the transactions involving its investment in Hi Energy Inc. during 2014.
b. Determine the December 31, 2014, balance of the Investment in Hi Energy Company. Stock account.
Answer:
2014
a. Jan. 4 Investment in Hi Energy Co. Stock* 5,456,000
Cash 5,456,000
*124,000 shares × $44 per share
July 2 Cash* 136,400
Investment in Hi Energy Co. Stock 136,400
*$440,000 × ($124,000 ÷ 400,000 shares)
Dec. 31 Investment in Hi Energy Co. Stock 248,000
Income of Hi Energy Co. 248,000
Record 31% share of Hi Energy
Co. net income, $800,000 ×
(124,000 shares ÷ 400,000 shares).
b. Initial acquisition cost……………………………………………………………… $5,456,000
Equity earnings for 2014………………………………………………………… 248,000
Cash dividends received…………………………………………………………… (136,400)
Investment in Hi Energy Co. Stock balance, December 31, 2014…………… $5,567,600