Question

Company T had 32,000 outstanding shares of common stock, par value $10 per share. On January 1 of the current year, Company P purchased some of Company T’s shares as a long-term investment at $23 per share. At the end of the current year, Company T reported the following: income, $48,000, and cash dividends declared during the year, $19,500. The fair value of Company T stock at the end of the current year was $20 per share.

2-a. Prepare the journal entries for Company P at the dates indicated assuming 3,200 shares of Company T were purchased. Assume the investment will be held long term.

2-b. Prepare the journal entries for Company P at the dates indicated assuming 8,000 shares of Company T were purchased. Assume the investment will be held long term.

3-a. Complete the following schedule to show the separate amounts that should be reported on the current year's balance sheet of Company P:

3-b. Complete the following schedule to show the separate amounts that should be reported on the current year's income statement of Company P:

Answer 1

Answer 2-a

Journal entries

In the books of Company P

Jan 1 Investment A/c Dr $ 73600

To bank A/c $ 73600

(Being 3200 Shares purchased @ $ 23 per share during the year)

Answer 2 -b

Journal Entries

In the books of Company P

Jan 1 Investment A/c Dr $ 184000

To bank A/c $ 184000

(Being 8000 Shares purchased @ $ 23 per share during the year)

Answer 3-a

Since company P purchased share as investment held for long term. This investment should be accounted at cost i.e purchase price.

Company P

Balance sheet As on 01st Jan

Liabilities	Amount	Assets	Amount
		Investment
		3200 Shares @ $ 23 per Share	$ 73600
		8000 Shares @ $ 23 per Share	$ 184000

Company P

Income Statement

For the year ended 01st Jan

Expenses	Amount	Income	Amount
		Income	$ 48000
		Cash Dividend	$ 19500

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