Question

Hinchen Ltd acquired a 20% interest in Marrow Ltd for $100 000. Profit after tax for Marrow Ltd after the first year is $100 000. Marrow Ltd paid a dividend in the first year of $10 000. Hinchen Ltd is not a parent.

With the assistance of the class, prepare the journal entries that would be required in the accounting records of Hinchen Ltd for the initial recording of the investment and also the first year since the investment in Marrow Ltd.

Do this using:

(1) the cost method, and

(2) the equity method.

What is the value of the investment after the first year under each scenario?

Discuss with the class the merits of using the equity method vs the cost method.