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On January 1, 2018, Alamar Corporation acquired a 38 percent interest in Burks, Inc., for $199,000. On that date, Burks's balance sheet disclosed net assets with both a fair and book value of $325,000. During 2018, Burks reported net income of $75,000 and declared and paid cash dividends of $22,000. Alamar sold inventory costing $25,000 to Burks during 2018 for $38,000. Burks used all of this merchandise in its operations during 2018. Prepare all of Alamar's 2018 journal entries to apply the equity method to this investment.

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Answer and Explanation:

The journal entries are shown below:

1. Investment in Burks inc $199,000

          To Cash $199,000

(being the investment purchased for cash is recorded)

2.  Investment in Burks inc ($75,000 × 38%) $28,500

          To equity in investment income $28,500

(Being the investment income is recorded)

3. Dividend receivable Dr  ($22,000 × 38%) $8,360

          To Investment in Burks inc $8,360

(Being the dividend receivable is recorded)

4. Cash Dr $8,360

       To Dividend receivable $8,360

(Being the collection of cash is recorded)

Only these four entries are passed

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