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Chapter 13: Q16E (page 658)

(Fair Value and Equity Method Compared) Jaycie Phelps Inc. acquired 20% of the outstanding common

stock of Theresa Kulikowski Inc. on December 31, 2017. The purchase price was \(1,200,000 for 50,000 shares. Kulikowski Inc.

declared and paid an \)0.85 per share cash dividend on June 30 and on December 31, 2018. Kulikowski reported a net income of

\(730,000 for 2018. The fair value of Kulikowski鈥檚 stock was \)27 per share on December 31, 2018.

Instructions

(a) Prepare the journal entries for Jaycie Phelps Inc. for 2017 and 2018, assuming that Phelps cannot exercise significant

influence over Kulikowski.

(b) Prepare the journal entries for Jaycie Phelps Inc. for 2017 and 2018, assuming that Phelps can exercise significant influence

over Kulikowski.

(c) At what amount is the investment in securities reported on the balance sheet under each of these methods at December

31, 2018? What is the total net income reported in 2018 under each of these methods?

Short Answer

Expert verified

a. Unrealized income is $150,000. Equity investment debited and cash credited by $1,200,000. Cash debited and dividend revenue credited by $42,500.

b. Income from investment is $146,000

Step by step solution

01

Journal entries according to fair value method

Date

Particulars

Debit

Credit

December 31, 2017

Equity Investment

$1,200,000

Cash

$1,200,000

(Entry for the purchase of outstanding common stock)

June 30, 2018

Cash (50,000 * $0.85)

$42,500

Dividend Revenue

$42,500

(Half yearly dividend received on shares)

December 31, 2018

Cash

$42,500

Dividend Revenue

$42,500

(Half yearly interest received)

December 31, 2018

Unrealized holding G/L- Income

$150,000

Fair value adjustment

$150,000

(adjustment of fair value)

UnrealizedHoldingGainorLossIncome=(PricePerShare脳NumberofShares)-PurchasePrice=($27脳50,000)-$1,200,000=$150,000

02

Journal entries according to the equity method

Date

Particulars

Debit

Credit

December 31, 2017

Equity Investment

$1,200,000

Cash

$1,200,000

(Entry for the purchase of outstanding common stock)

June 30, 2018

Cash

$42,500

Dividend Revenue

$42,500

(Half yearly dividend received on shares)

December 31, 2018

Cash

$42,500

Dividend Revenue

$42,500

(Half yearly interest received)

December 31, 2018

Equity Investment

$146,000

Revenue from Investment ($730,000*20%)

$146,000

(recording of income from investment)

03

Reporting in the balance sheet

Fair value method

Equity Method


Investment amount (balance sheet)

$1,350,000 ($27*50,000)

$1,261,000

Dividend Revenue(income statement)

$85,000 ($42,500 + $42,500)

Income from investment(income statement)

$146,000 ($1,200,000-$146,000-$85,000)

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Most popular questions from this chapter

(Fair Value Measurement) Presented below is information related to the purchases of common stock by Lilly

Company during 2017.

Cost Fair Value

(at purchase date) (at December 31)

Investment in Arroyo Company stock \(100,000 \) 80,000

Investment in Lee Corporation stock 250,000 300,000

Investment in Woods Inc. stock 180,000 190,000

Total \(530,000 \)570,000

Instructions

(Assume a zero balance for any Fair Value Adjustment account.)

(a) What entry would Lilly make at December 31, 2017, to record the investment in Arroyo Company stock if it chooses to

report this security using the fair value option?

(b) What entry(ies) would Lilly make at December 31, 2017, to record the investments in the Lee and Woods corporations,

assuming that Lilly did not select the fair value option for these investments?

Assume the same information as in IFRS 17-12 except that Roosevelt has an active trading strategy for these bonds.

The fair value of the bonds at December 31 of each end-year is as follows.

2017 \(534,200 2020 \)517,000

2018 \(515,000 2021 \)500,000

2019 $513,000

Instructions

(a) Pepare the journal entry at the date of the bond purchase.

(b) Prepare the journal entries to record the interest revenue and recognition of fair value for 2017.

(c) prepare the journal entry to record the recognition of fair value for 2018.

How is present value related to the concept of a liability?

Question: Amsterdam Company uses a periodic inventory system. For April, when the company sold 600 units, the following information is available.

Units Unit Cost Total Cost

April 1 inventory 250 \(10 \) 2,500

April 15 purchase 400 12 4,800

April 23 purchase 350 13 4,550

1,000 $11,850

Compute the April 30 inventory and the April cost of goods sold using the average-cost method.


Question: 13-17 (L04) (Ratio Computations and Discussion) Sprague Company has been operating for several years, and on December 31, 2017, presented the following balance sheet.

SPRAGUE COMPANY
BALANCE SHEET
DECEMBER 31, 2017

Cash

\(40,000

Accounts payable

\)80,0000

Receivables

\(75,0000

Mortgage payable

\)140,000

Inventory

\(95,000

Common stock (\)1 par)

\(150,000

Plant assets (net)

\)220,000

Retained earnings

\(60,000

\)430,000

\(430,000

The net income for 2017 was \)25,000. Assume that total assets are the same in 2016 and 2017.

Instructions

Compute each of the following ratios. For each of the four, indicate how it is computed and its significance as a tool in the analysis of the financial soundness of the company.

(a) Current ratio. (C) Debt to assets ratio.

(b) Acid-test ratio. (d) Return on assets.
See all solutions

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