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On January 1, 2014, Pennington Corporation purchased 25% of the common shares of Edwards Company...

Question:

On January 1, 2014, Pennington Corporation purchased 25% of the common shares of Edwards Company for $334,000. During the year, Edwards earned net income of $133,600 and paid dividends of $33,400.

Required:

1. Prepare the entries for Pennington to record the purchase and any additional entries related to this investment in Edwards Company in 2014.

Accounting For Investment - Equity method

Accounting for investments depends on whether an investor exercises control or significant influence over the investee. If an investor has more than 20% share ownership over the investee, the former is deemed to exercise significant control and should account for its investment using the equity method. On the other hand, if ownership over the investee is more than 50%, the investor is deeded to exercise control and should account for investments using the cost method of accounting.

Answer and Explanation:

Below are the journal entries to account for the usual transactions of investments accounted for under the equity method.

Journal Entry #AccountDebi...

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What is an Investment? - Definition & Overview

from Corporate Finance: Help & Review

Chapter 2 / Lesson 6
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