Journal Entries and Recommendations for Investment Accounting Methods

This assignment requires the preparation of journal entries using the cost method for the years 2014-2015 and the equity method for 2016-2017, reflecting Investor Corporation's investment transactions. It also includes a brief report recommending that the company adopt the equity method for bett...Read More

PRINCIPLE OF
ACCOUNTING 2

TABLE OF CONTENTS
a) Prepare Journal entries for 2014 and 2015 on investor corporation’s books using cost
method....................................................................................................................................1
b) Prepare journal entries for the year 2016 to 2017 using equity method............................2
c) Write brief report stating recommendation to senior management based on the above
information.............................................................................................................................4
REFERENCES...........................................................................................................................6

a) Prepare Journal entries for 2014 and 2015 on investor corporation’s books using cost
method
Date
2014
Particulars J.F. Debit Credit
Jan 1 Trading
securities a/c Dr
$150000
To cash $150000
(Being 8000
shares
purchased by
Investor
corporations at
cost)
May 31 Cash a/c Dr $12000
To Dividend
Revenue
$12000
( Being cash
received from
investee
company is
recognised as
dividend
revenue)
Dec 31 Investment a/c
Dr
To income
(Being cash
received from
the total
earnings)
Date Particulars J.F. Debit Credit
1

2015
Oct 1 Cash a/c Dr $8000
To Dividend
Revenue
$8000
( Being cash
received from
investee
company is
recognised as
dividend
revenue)
Dec 21 Investment a/c
Dr
$16000
To Income $16000
(Being cash
received from
the total
earnings)
Dec 31 Cash a/c Dr $178000
To investment $150000
To gain on sale $28000
( Being sale of
investments and
gain on sale)
b) Prepare journal entries for the year 2016 to 2017 using equity method
EQUITY METHOD
Date
2016
Particulars J.F. Debit Credit
Jan 1 Investment a/c
Dr
$150000
To cash $150000
2

(Being 8000
shares
purchased by
Investor
corporations at
cost consider as
non-current
asset)
May 31 Cash a/c Dr $12000
To Investment $12000
(Being dividend
received from
investee in cash)
Dec 31 Investment a/c
Dr
$20000
To income $20000
( Being
recording of
income held by
investor in
investee’s firm
$100000*20%=
$20000)
Date
2017
Particulars J.F. Debit Credit
Oct 1 Cash a/c Dr $8000
To Investment $8000
(Being dividend
received from
investee in cash)
Dec 21 Investment a/c $16000
3

Dr
To income $16000
( Being
recording of
income held by
investor in
investee’s firm
$80000*20%=
$16000)
Dec 31 Cash a/c Dr $178000
To Investment
a/c
$150000
To gain on sale
of investment in
investee
company
$28000
( Being sale of
investment in
investee
company by
earning on sale)
c) Write brief report stating recommendation to senior management based on the above
information.
It is recommended from the above that states that in both costs and equity method
investments are treated as non-current assets held by an entity. Most effective method for
accounting of all the investments held in an entity is equity method which helps in
considering all the shares purchased by an investor in the investee’s business is treated as
non-current or fixed asset in the balance sheet of the firm. It is advised to the senior
management to increase its investments by investing in different sources to generate higher
income within a stipulated time period. Investments incurred in a business needs to be
managed by preparing investment schedule that considers all the investments of the business
concern.
4

Investments are valued by applying two methods such as costs as well as net
realisable value of all the investments incurred in an entity. As relevant section of
international financial reporting standard, inventory is valued by using this approach. Value
of investment will be lower than costs as well as net realisable value in the business.
Disclosures statements need to be filed by all the stakeholders located in the external entity
which helps in comply with all the standards to get the desired image of the business in the
external environment. Investments are prioritized into various categories such as higher or
lower investments held by an enterprise owner. With the help o prioritization of all the
investments, the best suitable investments are considered by the firm that meets all rrhe
desired needs of the business concern.
5