Problem:
Roller Corporation purchased 20 percent ownership of Steam Company on January 1, 20X5, for $70,000. On that date, the book value of Steam's reported net assets was $200,000. The excess over book value paid is attributable to depreciable assets with a remaining useful life of 10 years. Net income and dividend payments of Steam in the following periods were:
Year Net Income Dividends
20X5 $20,000 $5,000
20X6 $40,000 $15,000
20X7 $20,000 $35,000
Instructions:
Prepare journal entries on Roller Corporation's books relating to its investment in Steam Company for each of the three years, assuming it accounts for the investment using (a) the cost method and (b) the equity method.