Kudos Corporation bought a 40% interest in the voting stock of Nutrition Corporation's $1 par value

common stock for $20 million (2 million shares at a $10 market price) on March 31, 2010. On December
12, 2010, Nutrition declared and paid a $1 million cash dividend and reported net income for the year
ended 2010 of $10 million. On December 31, 2010, Nutrition's stock was trading at $11.50 per share.

PROBLEM 1
By buying 40% of Nutrition Corporation’s Common Stock, Kudos Corporation has a significant influence
over Nutrition Corporation, hence the investment should be reported using equity method.
a. To record the acquisition of Nutrition Corporation on March 31, 2010, the journal would be:
Dr. Investment in Affiliate $20,000,000
Cr. Cash $20,000,000

b. To record the cash dividend received on December 12, 2010, the journal would be:
Dr. Cash $400,000
Cr. Investment in Affiliate $400,000

To record earnings in affiliate, the journal would be:

Dr. Investment in Affiliate $4,000,000
Cr. Equity in Affiliates Earnings $4,000,000

c. Under equity method, at the end of accounting period Kudos Corporation investment’s in Nutrition
Corporation is not adjusted to fair value as is done with investments in securities available for sale
unless it’s being sold. The investment position will shown as:
INVESTMENT IN AFFILIATE
3/31/2010
Purchase $20,000,000

12/12/2010
Net Income $4,000,000 Dividend $400,000

12/31/2010 $23,600,000

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