Pistol Corporation purchased 100 percent ownership of Scope Products on January 1, 20X6, for $56,000, at which time Scope Products reported retained earnings of $10,000 and capital stock outstanding of $30,000. The differential was attributable to patents with a life of eight years. Income and dividends of Scope Products were

1.20X6

1a. Dr Investment in Scope Products$56,000

Cr Cash $56,000

1b. Dr Cash$ 6,000

Cr Investment in Scope Products $ 6,000

1c. Dr Investment in Scope Products$16,000

Cr Income from Scope Products $16,000

1d. Dr Income from Scope Products$2,000

Cr Investment in Scope Products $2,000

20X7

2a. Dr Cash$8,000

Cr Investment in Scope Products $8,000

2b. Dr Investment in Scope Products$24,000

Cr Income from Scope Products $24,000

2c. Dr Income from Scope Products$2,000

Cr Investment in Scope Products $2,000

20X8

3a. Dr Cash$8,000

Cr Investment in Scope Products $8,000

3b. Dr Investment in Scope Products32,000

Cr Income from Scope Products 32,000

3c. Dr Income from Scope Products$2,000

Cr Investment in Scope Products $2,000

2.$98,000

Explanation:

1. Preparation of the equity method entries that Pistol should record to account for this investment in 20X6, 20X7, and 20X8.

Equity Method Journal Entries for Pistol Corporation.

20X6

1a. Dr Investment in Scope Products$56,000

Cr Cash $56,000

1b. Dr Cash$ 6,000

Cr Investment in Scope Products $ 6,000

1c. Dr Investment in Scope Products$16,000

Cr Income from Scope Products $16,000

1d. Dr Income from Scope Products$2,000

Cr Investment in Scope Products $2,000

{ ($56,000-$10,000-$30,000) /8 years }

20X7

2a. Dr Cash$8,000

Cr Investment in Scope Products $8,000

2b. Dr Investment in Scope Products$24,000

Cr Income from Scope Products $24,000

2c. Dr Income from Scope Products$2,000

Cr Investment in Scope Products $2,000

{ ($56,000-$10,000-$30,000) /8 years }

20X8

3a. Dr Cash$8,000

Cr Investment in Scope Products $8,000

3b. Dr Investment in Scope Products32,000

Cr Income from Scope Products 32,000

3c. Dr Income from Scope Products$2,000

Cr Investment in Scope Products $2,000

{ ($56,000-$10,000-$30,000) /8 years }

2. Calculation to determine the Balance in Investment in Scope Products.

ParticularsAmount ($)

Initial Investment Amount$56,000

Add : Share of Income$72,000

($16,000+$24,000+$32,000)

Less : Dividend Received ($22,000)

($6,000+$8,000+$8,000)

Less : Patent Amortization ($6,000)

($2,000 * 3 years)

Balance in Investment in Scope Products Account as on Dec. 31 20X8$98,000

Therefore the balance of the Investment in Scope account on Pistol balance sheet at December 31, 20X8, after all required equity method entries have been recorded is $98,000

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