Question

Exercise 16-18 Your answer is partially correct. Try again. The following are two independent situations. 1. Cullumber Cosmetics acquired 15% of the 153,000 shares of common stock of Nevins Fashion at a total cost of $13 per Cullum share on March 18, 2020. On June 30, Nevins declared and paid a $76,300 dividend. On December 31, Nevins reported net income of $127,200 for the year. At December 31, the market price of Nevins Fashion was $15 per share. Pharoah, Inc., obtained significant influence over Rogan Corporation by buying 35% of Rogan's 22,300 outstanding shares of common stock at a total cost of $7 per share on January 1, 2020. On June 15, Rogan declared and paid a cash dividend of $26,600. On December 31, Rogan reported a net income of $73,100 for the year. 2. Prepare all the necessary journal entries for 2020 for (a) Cullumber Cosmetics and (b) Pharoah, Inc. (Credit account titles are automatically indented when amount is entered. Do not indent manually. Record journal entries in the order presented in the problem. If no entry is required, select "No entry" for the account titles and enter O for the amounts.)

Answer 1

When the investment in investee company is less than 20%, then significant interest should not exercised.
When the significant interest should not exercised, then fair value method used for recording the investment.
Cullumber		Fair value method
Date	General Journal	Debit	Credit
March 18	Investment - Nevins fashions	$            298,350
	Cash		$            298,350
	(To record Purchase of Investment.) (153000*15%= 22950) (22950*13)
June 30	Cash	$              11,445
	Dividend Income		$              11,445
	(To record Dividend Received.) (76300*15%)
December 31	No Journal entry Required for Net income.
December 31	Investment - Nevins fashions	$              45,900
	Unrealized Gain/Loss - other comprehensive income		$              45,900
	(To record Fair Value Adjustment.) ((15-13)*22950)
When the investment in investee company is more than 20%, then significant interest should exercised.
When the significant interest should exercised, then equity method used for recording the investment.
Pharoah		Equity method
Date	General Journal	Debit	Credit
January 1	Equity Investment In Rogan	$              54,635
	Cash		$              54,635
	(To record Purchase of Investment.) (22300*35%= 7805) (7805*7)
June 15	Cash	$                9,310
	Equity Investment In Rogan		$                9,310
	(To record Dividend Received.) (26600*35%)
Dec 31	Equity Investment In Rogan	$              25,585
	Income from Equity Investment		$              25,585
	(To record Income from Equity Investment. ) (73100*35%)
Dec 31	No Journal entry Required for Fair Value Adjustment.