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Chapter 12: Brief Exercises (page 610)

Fairbanks Corporation purchased 400 shares of Sherman Inc. common stock for \(13,200 (Fairbanks does not have significant influence). During the year, Sherman paid a cash dividend of \)3.25 per share. At year-end, Sherman stock was selling for $34.50 per share. Prepare Fairbanks鈥� journal entries to record (a) the purchase of the investment, (b) the dividends received, and (c) the fair value adjustment. (Assume a zero balance in the Fair Value Adjustmentaccount.)

Short Answer

Expert verified

a) The amount debited to equity investment is $13,200.

b) The amount of dividend received is $1,300.

c) The gain on the investment is $600.

Step by step solution

01

Step-by-Step Solution Step 1: Definition of common stock 

Common stock is the stock in which the dividend amount is not fixed. Theamount of dividendsfluctuate.

02

 Journal entry of the purchase of the investment

Date

Description

Debit

Credit

A.

Equity Investment

$13,200

Cash

$13,200

Being entry to record the purchase of common stock

03

Journal entry for the interest received

Date

Description

Debit

Credit

B

Cash

$1,300

Investment Revenue

$1,300

Being entry of dividend received

04

Adjustment entry for the fair value

Date

Description

Debit

Credit

C

Investment in Equity*

$600

Gain on investment

$600

Being gained on the sale of common stock

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Most popular questions from this chapter

Question: (Accounting for Patents) During 2013, Winston Corporation spent \(170,000 in research and development costs. As a result, a new product called the New Age Piano was patented. The patent was obtained on October 1, 2013, and had a legal life of 20 years and a useful life of 10 years. Legal costs of \)18,000 related to the patent were incurred as of October 1, 2013.

Instructions

(a) Prepare all journal entries required in 2013 and 2014 as a result of the transactions above.

(b) On June 1, 2015, Winston spent $9,480 to successfully prosecute a patent infringement suit. As a result, the estimate of useful life was extended to 12 years from June 1, 2015. Prepare all journal entries required in 2015 and 2016.

(c) In 2017, Winston determined that a competitor鈥檚 product would make the New Age Piano obsolete and the patent worthless by December 31, 2018. Prepare all journal entries required in 2017 and 2018.

Hiram Co. uses the equity method to account for investments in common stock. What accounting should be made for dividends received from these investments subsequent to the date of investment?

Question: (Accounting for Goodwill) On July 1, 2017, Brigham Corporation purchased Young Company by paying \(250,000 cash and issuing a \)100,000 note payable to Steve Young. At July 1, 2017, the balance sheet of Young Company was as follows.

Cash
\( 50,000
Accounts payable
\)200,000
Accounts receivable
90,000
Stockholders鈥� equity
235,000
Inventory
 100,000

\(435,000
Land
40,000


Buildings (net)
75,000


Equipment (net)
70,000


Trademarks
10,000



\)435,000






The recorded amounts all approximate current values except for land (fair value of \(60,000), inventory (fair value of \)125,000), and trademarks (fair value of \(15,000).

Instructions

Prepare the July 1 entry for Brigham Corporation to record the purchase.

Prepare the December 31 entry for Brigham Corporation to record amortization of intangibles. The trademark has an estimated useful life of 4 years with a residual value of \)3,000.

Question: (Goodwill Impairment) Presented below is net asset information related to the Carlos Division of Santana, Inc.


CARLOS DIVISION

NET ASSETS

AS OF DECEMBER 31, 2017

(IN MILLIONS)

Cash

\( 50

Accounts receivable

200

Property, plant, and equipment (net)

2,600

Goodwill

200

Less: Notes payable

(2,700)

Net assets

\) 350

The purpose of the Carlos Division is to develop a nuclear-powered aircraft. If successful, traveling delays associated with refueling could be substantially reduced. Many other benefits would also occur. To date, management has not had much success and is deciding whether a write-down at this time is appropriate. Management estimated its future net cash flows from the project to be \(400 million. Management has also received an offer to purchase the division for \)335 million. All identifiable assets鈥� and liabilities鈥� book and fair value amounts are the same.

Instructions

a. Prepare the journal entry (if any) to record the impairment at December 31, 2017.

b. At December 31, 2018, it is estimated that the division鈥檚 fair value increased to $345 million. Prepare the journal entry (if any) to record this increase in fair value.

Explain why reclassification adjustments are necessary.
See all solutions

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