Rowan Co. purchases 900 common shares (40%) of JBI Corp. as a long-term investment for $580,000 cash on July 1. JBI Corp. paid $11,000 in total cash dividends on November 1 and reported net income of $220,000 for the year.

Prepare Rowan's entries to record the purchase of JBI shares, the receipt of its share of JBI dividends and the December 31 year-end adjustment for its share of JBI net income.

See explanation section

Explanation:

Rowan Co.

Journal Entries

1. July 1 Investment - JBI Corp. Debit $580,000

Cash Credit $580,000

(As Rowan purchases JBI co. share as an investment, an asset (Investment) increases and another asset (Cash).

2. November 1 Cash Debit $4,400

Dividend on Investment - JBI Corp. Credit $4,400

(As JBI co. received dividend, Rowan co. received cash for investing in JBI co.'s 40%)

Calculation: $11,000 × 40% = $4,400.

3. December 31 Investment - JBI Co. Debit $88,000

Share of Net Income - JBI Co. Credit $88,000

(As Rowan Co. purchases JBI company' s share, they will receive the share of net income of JBI co.)

Calculation: $220,000 × 40% = $88,000