On July 1, 2021, Clearwater Inc. purchased 8,000 shares of the outstanding common stock of Mountain...
On July 1, 2021, Clearwater Inc. purchased 8,000 shares of the outstanding common stock of Mountain Corporation at a cost of $160,000. Mountain had 40,000 shares of outstanding common stock. The total book value and total fair value of Mountain’s individual net assets on July 1, 2021, are both $800,000. The total fair value of the 40,000 shares of Mountain’s common stock on December 31, 2021, is $860,000. Both companies have a January through December fiscal year.
The following data pertains to Mountain Corporation during 2021:
Dividends declared and paid, January 1–June 30 $ 13,000
Dividends declared and paid, July 1–December 31 $ 13,000
Net income, January 1–June 30 $ 15,000
Net income, July 1–December 31 $ 19,000
Required:
1. Prepare the necessary journal entries for 2021 under the equity method (other than for the purchase).
a.Record the entry for cash dividend received under the equity method.
b.Record the entry for investment revenue under the equity method.
c.Record the unrealized gain or loss for securities available for sale.
2. Prepare any necessary journal entries for 2021 (other than for the purchase) that would be required if the securities were accounted for under the fair value through net income method.
a.Record the entry for cash dividend received under the equity method.
b.Record the entry for cash dividend received for securities available for sale.
c.Record the unrealized gain or loss for securities available for sale.
Homework Answers
| journal entries for 2021 under the equity method | ||||||
| 1-Jul-21 | 8000 share purchase | 160,000 | ||||
| Total no. of shares of Mountain corporation | 40000 | |||||
| %age of shares purchased | 20% | |||||
| book value and total fair value of Mountain’s individual net assets on July 1, 2021 | 800,000 | |||||
| Fair value of shares on 31st December | 860,000 | |||||
| FV per share | 21.50 | |||||
| Particulars | Debit | Credit | ||||
| Dividend received | ||||||
| Cash | 2,600 | |||||
| Investment in Mountain | 2,600 | |||||
| Investment revenue | ||||||
| Investment in Mountain | 3,800 | |||||
| Income from Mountain | 3,800 | |||||
| Unrealized gain/loss | ||||||
| Investment in Mountain | 10,800 | |||||
| Fair value gain on investment-OCI | 10,800 | |||||
| journal entries for 2021 if the securities were accounted for under the fair value through net income method | ||||||
| Particulars | Debit | Credit | ||||
| Dividend received | ||||||
| Cash | 2600 | |||||
| Dividend income | 2600 | |||||
| Unrealized gain/loss | ||||||
| Investment in Mountain | 12000 | |||||
| Fair value gain on investment | 12000 | |||||
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