Hobson acquires 40 percent of the outstanding voting stock of Stokes Company on January 1, 2012, for $276,500 in cash. The book value of Stokes's net assets on that date was $530,000, although one of the company's buildings, with a $71,600 carrying value, was actually worth $122,850. This building had a 10-year remaining life. Stokes owned a royalty agreement with a 20-year remaining life that was undervalued by $110,000.
Stokes sold inventory with an original cost of $52,500 to Hobson during 2012 at a price of $75,000. Hobson still held $15,900 (transfer price) of this amount in inventory as of December 31, 2012. These goods are to be sold to outside parties during 2013.
Stokes reported a loss of $88,100 for 2012, $58,200 from continuing operations and $29,900 from an extraordinary loss. The company still manages to pay a $11,000 cash dividend during the year.
During 2013, Stokes reported a $44,600 net income and distributed a cash dividend of $13,000. It made additional inventory sales of $88,000 to Hobson during the period. The original cost of the merchandise was $55,000. All but 30 percent of this inventory had been resold to outside parties by the end of the 2013 fiscal year.
Prepare all journal entries for Hobson for 2012 and 2013 in connection with this investment. Assume that the equity method is applied. The following dates and necessary entries are below. Show what accounts should be debited and credited per entry.