Example 1:

Top company owns 40% of 100,000 shares outstanding of Bottom Company, and investment accounted for by the equity method. Any excess investment cost over Tops share of Bottoms book value is considered goodwill.

Although these 40,000 shares were acquired some years ago for $200,000, application of the equity method has increased the asset balance to $320,000 as of January 1, 2021.

On July 1, 2021, Top elects to sell 10,000 of these shares (one-fourth of its investments) for $110,000 in cash, thereby reducing ownership in Bottom from 40% to 30%.

Bottom reports net income of $70,000 during the first six months of 2021 and declares and pays cash dividends of $30,000.

Prepare journal entries:

Account title	Debit	Credit
To accrue earnings of a 40% of Bottom the first 6 months of 2021 income
To record a dividend declaration by Bottom Company
To record collection of cash dividend from Bottom Company
To record the sale of one-fourth of investment in Bottom Company (The current balance of investment in Bottom Company x = The difference between Cash received and current balance is recorded as Gain on Sale of Investment)

Example 2:

Top company owns 40% of 100,000 shares outstanding of Bottom Company, and investment accounted for by the equity method. Any excess investment cost over Tops share of Bottoms book value is considered goodwill.

Although these 40,000 shares were acquired some years ago for $200,000, application of the equity method has increased the asset balance to $240,000 as of January 1, 2021.

On July 1, 2021, Top elects to sell 20,000 of these shares (one-half of its investments) for $90,000 in cash, thereby reducing ownership in Bottom from 40% to 20%.

Bottom reports net income of $60,000 during the first six months of 2021 and declares and pays cash dividends of $10,000.

Prepare journal entries:

Account title	Debit	Credit
To accrue earnings of a 40% of Bottom the first 6 months of 2021 income
To record a dividend declaration by Bottom Company
To record collection of cash dividend from Bottom Company
To record the sale of one-fourth of investment in Bottom Company (The current balance of investment in Bottom Company x 1/2 = The difference between Cash received and current balance is recorded as Gain on Sale of Investment)