On January 1, year 1 , KLM Co. acquired 40% interest in Nerox Company for $3,00,000. During the year 1, Nerox had net income of $90,000 and paid a $40,000 dividend.

I would like to knw the effects that would go in income statement...

Thanx

this what I would do -

KLM acquired Nerox 40%

Nerox Net Income =90,000, dividends paid 40,000

KLM JE

dr- investment in Nerox 36,000

    cr-equity earnings 36,000

Dividends has not effect on the income statement of KLM

The JE would be

dr-cash 16,000

   cr- Investment in Nerox 16,000

thanx wannabe...:)

so Dr.cash     16000

    cr. investment in nerox 16000

wud go in Balance sheet right?

Yes, the Investment in Nerox go in the balance sheet. As the total amount of debits (price paid for nerox + equity earnings) minus cr (dividends paid). hope it's clear.

correct ! KLM's investment account increased on account of its share in the earnings of the Nerox Company, however, it received dividends so dividends are deducted from the Investment account.

Take dividends as withdrawls from the earnings..... when u r doing equity method