Assignment Choice #1: Equity and Cost Methods in Accounting
Using QuickBooks™ to Record the Transactions
Follow these directions to set up QuickBooks™ for Module 3’s
Critical Thinking Assignment:
1. Load
QuickBooks™ CD; enter the information on the disc sleeve when asked for the
license and product number.
2. Once
QuickBooks™ is loaded, reboot your computer. Once rebooted, click icon entitled
QuickBooks™, go through the agreement question(s), and then select “create a
new company” and “express set-up”.
3. Enter the
company name, “Investor Corp.” with your address and phone number of your
choice. The industry is financial services. The corporation will have a tax ID
of 99-1234567, with no employees. Use your own address and CSU Global email,
and then you can create a company and select start.
4. Select
home on the left side of the screen and the icons will appear. To start, go to
the top panel and select account > general ledger.
5. Create
two cash accounts: Cash - Cost Method and Cash - Equity Method. For each cash
account, classify as bank with the description written in saying “cash to buy
Investee Corporation”.
6. Go to the
home screen by selecting the left side tab for home to go to the top panel.
7. Select
account > general ledger and deposit $1 million into the cash account as a
debit to cash and a credit to capital stock.
For the cost method, assign a date of 1/1/2014 for the deposit and for
the equity method, assign a date of 1/1/2016 for the deposit of the cash.
8. Then
return to the home menu. Select chart of accounts and then add new accounts for
other assets: one called Investee Corp - Cost Method and the other Investee
Corp - Equity Method (classify both as other assets).
9. Again
return to home. Select chart of accounts and then add new accounts, one called
Dividend - Cost Method and the other called Dividend – Equity Method (classify both
as according to the textbook definitions of each.)
10. Lastly,
return to home. Select chart of accounts and then add new accounts, one called
Gain - Cost Method and the other Gain - Equity Method (both are income
accounts).
Important to remember:
• Do not
forget to click on ‘save and close’ after you input and file.
• Backup
your company information many times as you work.
• Always
check to be sure your input dates are the end of the year, especially if you
cannot find an input.
To start, go to the top panel and select account general
ledger to complete the exercise below for both the equity method and the cost
method of accounting for a long-term investment. Enter your journal entries
from the top panel and select account, general ledger.
To submit for each method, select from the top ribbon
reports > accounting and taxes > and then transaction detail by account.
(Be sure the dates for the account are from 1/1/14 to 12/31/17). Export to
Excel and then submit the details in two separate Excel spreadsheets for the
two methods. Be sure to check your dates when both entering the transaction and
exporting the information to Excel. Label the first Excel file: Mod 3-Option
1-Investee Corp.
Additionally, for the cost method use the earlier year. For
the equity method, use the later year.
2014/2016
Jan
1
Investor Corporation purchased 8,000 shares (20%) of
Investee Company’s outstanding stock at a cost of $150,000.
May 31 Investee Company declared and paid a
cash dividend of $1.50 per share.
Dec 31 Investee Company announced that its
net income for the year was $100,000.
2015/2017
Oct
1
Investee Company declared and paid a cash dividend of $1.00
per share.
Dec 21 Investee Company announced that its
net income for the year was $80,000.
Dec.
31
Investor Corporation sold all of its shares of Investee
Company for $178,000 cash.
Required:
1. Cost
method: Prepare journal entries for years 2014 and 2015 in QuickBooks™ on
Investor Corporation’s books using the cost method, which assumes that investor
does not have significant influence over Investee (for example, another
corporation owns 70% of Investee Company’s stock).
2. Equity
method: Prepare in QuickBooks™ the journal entries for years 2016 to 2017 on
Investor Corporation’s books using the equity method, which assumes that
Investor has significant influence over Investee Company.
3. Under the
equity method Excel submission: Write a brief report between 200 and 300 words
in length outlining your recommendations to senior management based on the
information presented here.
