Crespo Company Purchased 42,000 Shares of Common Stock of the Paive

question 61

Essay

Crespo Company purchased 42,000 shares of common stock of the Paive Corporation as an investment for $1,000,000. During the year, Paive Corporation reported net income of $400,000 and paid dividends of $100,000.
Instructions
(a) Assuming that the 42,000 shares represent a 15% interest in Paive Corporation:
1. Prepare the journal entry to record the investment in Paive stock.
2. Prepare any entries that Crespo Company should make in accounting for its investment in Paive stock during the year.
3. What is the balance of the Stock Investments account on Crespo Company's books at the end of the year?
(b) Repeat requirement (a) above except assume that the 42,000 shares represent a 25% interest in Paive Corporation.

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Definitions:

Indirect Method

A way of reporting cash flows from operating activities in the cash flow statement where net income is adjusted for changes in balance sheet accounts to calculate the cash from operations.

Accounts Receivable

Represents money owed to a company by customers for products or services sold on credit.

Indirect Method

A method of preparing the cash flow statement where net income is adjusted for changes in balance sheet accounts to calculate cash from operating activities.

Net Income

Represents the total earnings of a company after subtracting all expenses, taxes, and costs from its total revenue.