On March 1, 2021, Carnegie Inc., a public company, purchased 15% of the common shares of Aquinas Auto Inc. for $225,000. The remaining shares (85%) are widely dispersed. Carnegie Inc. considers this a strategic investment and a critical step into a developing consumer market. Carnegie has placed two members on the eight person board of directors of Aquinas and the two members believe they have been influential on the board through the year. Carnegie and Aquinas both have a December 31 year end. During 2021, Aquinas Auto reported profi t of $150,000 and paid total dividends of $35,000.

Instructions

a. Refer to the facts in the question. Does Carnegie have significant influence over Aquinas Auto?
b. Prepare the following journal entries for Carnegie assuming significant influence does exist.

1. The acquisition of the investment

2. Investment revenue and receipt of dividends related to the investment

c. During 2022, Aquinas reports profit of $325,000 and pays total dividends of $45,000. Prepare the required journal entries related to these transactions on Carnegie’s books.

d. Determine the balance in the investment account on December 31, 2021, and December 31, 2022.

e. Show how the investment account and related revenue accounts would be reported on the financial statements for December 31, 2021.

Taking It Further

In the question, Carnegie asserts that the investment in Aquinas is a strategic decision to help enter a new consumer market. How will owning a portion of Aquinas help Carnegie in this regard?