Question

Perry Investments bought 2,000 shares of Able, Inc. common stock on January 1, 2017, for $20,000 and 2,000 shares of Baker, Inc. common stock on July 1, 2017 for $24,000. Baker paid $2,400 of previously declared dividends to Perry on December 31, 2017. At the end of 2017, the fair value of the Able stock was $18,000 and the fair value of the Baker stock was $28,000. The stocks were purchased for short-term speculation prior to the effective date of the change in accounting rules for equity investments. Perry owns 10% of each company. Perry should record the receipt of the Baker dividend as:_______.
A. DR Cash 2,400 CR Investment in Baker 2,400.
B. DR Cash 240 CR Dividend income 240.
C. DR Cash 2,400 CR Dividends receivable 2,400.
D. DR Dividends receivable 2,400 CR Dividend income 2,400.

Answer 1

Answer:

D. DR Dividends receivable 2,400 CR Dividend income 2,400.

Explanation:

The journal entry is shown below:

Dividend receivable Dr $2,400

            To Dividend income $2,400

(Being the receipt of the baker dividend is recorded)

For recording this we debited the dividend receivable as it increased the balance of dividend and credited the dividend income as it also increased the income

Therefore option D is correct