Question 2 (25 marks)

Unit 8 - Investments

The Trendy Clothing Corporation reported the following transactions for the year 2019:

Jan.1 Purchased 35% of the common shares of Cool Hoodies Corporation for $550,000.

This is a long-term investment giving Trendy Clothing significant influence over the operations of Cool Hoodies.

Sept. 30 Received a $34,000 dividend on the Cool Hoodies Corporation stock.

Dec. 31 Cool Hoodies Corporation reported net income of $167,500 for the year ended December 31, 2019.

Dec. 31 Trendy Clothing sold 50% of the Cool Hoodies shares for $300,000.

Prepare journal entries to record all the above events for the Trendy Clothing Corporation.

		Debit	Credit
Jan 1
Sept 30
Dec 31
	.

Why is understanding the extent to which one company influences another company important for accounting purposes? What impact does the degree of influence have on accounting?

When the equity method is used to account for a stock investment, dividends received are recorded as a reduction to the Investment account and the investor's share of income reported by the investee is treated as an increase in the Investment account. Explain why the investment is accounted for in this fashion.