To maintain closer ties with associated companies in the oil business, King Oil Company decided to purchase holdings of common shares in several companies. The following is a list of activities associated with these acquisitions during 20X5.
February 15 Acquired 80,000 shares of Lub Oil Co. at $ 8 per share, representing 70% of the outstanding shares. At date of acquisition, carrying value of the Lub Oil Co.’s net assets was $ 800,000. Assets were considered to be valued at market.
April 13 Acquired 140,000 shares of Richman Refineries at $ 11 per share representing 60% of the outstanding shares. The purchase price corresponds to the underlying carrying value.
May 17 Acquired 50,000 shares of Discovery Co. Ltd. at $ 5 per share representing 2% of the outstanding shares.
June 30 Lub Oil Co. announced a loss of $ 50,000 for the first six months of 20X5. Richman Refineries announced earnings of $ 120,000 for the first six months of 20X5 and declared a dividend of $ 0.10 per share.
August 15 Dividend received from Richman Refineries.
October 11 Dividend of $ 0.05 per share received from Discovery Co. Ltd. with a statement of earnings for the six months ended September 30 indicating net earnings of $ 60,000.
December 31 Lub Oil Co. announced a loss of $ 40,000 for the year. Richman Refineries announced earnings of $ 200,000 for the year, including a gain of $ 40,000.
Discovery Co. Ltd. announced earnings of $ 90,000 for the nine months ended December 31.
To date, there has been no goodwill impairment.

1. Investments in shares could be recorded and/ or reported using either the equity method or the cost method. Distinguish between the two methods, indicating under what circumstances each method should be used.
2. Prepare journal entries to record the above transactions in the books of King Oil Company, assuming the use of the equity method of accounting where appropriate for reporting purposes.

  • CreatedMarch 13, 2015
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