Question

Problem 15-4A Accounting for long-term nvestments in securities: vith and without ignificant influence 3 P4 ok for $1.5600 ock at December 31 Selk Steel Co, which began operations on January 4, 2017. had the following subsequent events in its long-term investments. 2017 Jan. 5 Sclk purchased 60,000 shares (20% of total) of Kildaire's common stock for S1 S Oct. 23 Kildaire declared and paid a cash dividend of $3.20 per share. Dec. 31 Kildaire's net income for 2017 is 51.164.000, and the fair value of its stock at $30.00 per share. 2018 Oct. 15 Kildaire declared and paid a cash dividend of $2.60 per share. Dec. 31 Kildaire's net income for 2018 is $1,476,000, and the fair value of its stock at $32.00 per share. 2019 Jan. 2 Selk sold all of its investment in Kildaire for $1,894,000 cash. Part 1 Assume that Selk has a significant influence over Kildaire with its 20% share of stock. December 313 * Carrying value mare. $29 Required 1. Prepare journal entries to record these transactions and events for Selk. 2. Compute the carrying (book) value per share of Selk's investment in Kildaire commons flected in the investment account on January 1, 2019. 3. Compute the net increase or decrease in Selk's equity from January 5, 2017, through January 2010 resulting from its investment in Kildaire. Part 2 Assume that although Selk owns 20% of Kildaire's outstanding stock, circumstances indicate that it does not have a significant influence over the investee and that it is classified as an available-for-sale security investment 1912/2019 Dr ed Gair-Equity Required 1. Prepare journal entries to record the preceding transactions and events for Selk. Also prepare an enty dated January 2, 2019, to remove any balance related to the fair value adjustment. 2. Compute the cost per share of Selk's investment in Kildaire common stock as reflected in the love ment account on January 1, 2019, 3. Compute the net increase or decrease in Selk's equity from January 5, 2017. through January resulting from its investment in Kildaire. (3) Net increase

Answer 1

Part 1:

Requirement 1: Prepare the following journal entries

Date	Account Title and Explanation	Debit	Credit
Jan 5	Equity Investments - Long term	$1,560,000
2017	Cash		$1,560,000
	To record 60,000 shares purchased
Oct 23	Cash (60,000 shares × $3.20 per share)	$192,000
2017	Equity Investments - Long term		$192,000
	To record cash dividends received
Dec 31	Equity Investments - Long term ($1,164,000 × 20%)	$232,800
2017	Revenue from Equity Investments		$232,800
	To record equity in investee earnings
Oct 15	Cash (60,000 shares × $2.60 per share)	$156,000
2018	Equity Investments - Long term		$156,000
	To record cash dividends received
Dec 31	Equity Investments - Long term ($1,476,000 × 20%)	$295,200
2018	Revenue from Equity Investments		$295,200
	To record equity in investee earnings
Jan 2	Cash	$1,894,000
2019	Gain on Sale of Investments ($1,894,000 −$1,740,000)		$154,000
	Equity Investments - Long term		$1,740,000
	To record sale of investments

Note: Compute book value of investment on January 1, 2019 as follows

Particulars	Amount
Cost of investments	$1,560,000
Deduct: Cash dividends - 2017	($192,000)
Add: Earnings - 2017	$232,800
Deduct: Cash dividends - 2018	($156,000)
Add: Earnings - 2018	$295,200
Book value of investments	$1,740,000

Requirement 2: Compute carrying value per share as follows

Carrying value per share = Book Value of Investment ÷ Number of Shares

= $1,740,000 ÷ 60,000 shares

= $29 per share

Requirement 3: Compute net increase or decrease in equity as follows

Particulars	Amount
Equity in Earnings of investee - 2017	$232,800
Equity in Earnings of investee - 2018	$295,200
Gain on sale of investments	$154,000
Net increase in equity	$682,000

Part 2

Requirement 1: Prepare the journal entries as follows

Date	Account Title and Explanation	Debit	Credit
Jan 5	Available-for-Sale Investments - Long term	$1,560,000
2017	Cash		$1,560,000
	To record 60,000 shares purchased
Oct 23	Cash (60,000 shares × $3.20 per share)	$192,000
2017	Dividend Revenue		$192,000
	To record cash dividends received
Dec 31	Fair Value Adjustment - AFS (60,000 × $30) − $1,560,000	$240,000
2017	Unrealized Holding Gain - Equity		$240,000
	To record fair value adjustment AFS investments
Oct 15	Cash (60,000 shares × $2.60 per share)	$156,000
2018	Dividend Revenue		$156,000
	To record cash dividends received
Dec 31	Fair Value Adjustment - AFS (60,000 × $32) − (60,000 × $30)	$120,000
2018	Unrealized Holding Gain - Equity		$120,000
	To record fair value adjustment AFS investments
Jan 2	Cash	$1,894,000
2019	Gain on Sale of Investments ($1,894,000 −$1,560,000)		$334,000
	Available-for-Sale Investments - Long term		$1,560,000
	To record sale of investments
Jan 2	Unrealized Holding Gain - Equity ($240,000 + $120,000)	$360,000
2019	Fair Value Adjustment - AFS		$360,000
	To remove fair value adjustment

Requirement 2: Compute cost per share as follows

Cost per share = Cost of Investment ÷ Number of Shares

= $1,560,000 ÷ 60,000 shares

= $26 per share

Requirement 3: Compute increase in equity as follows

Particulars	Amount
Dividend Revenue - 2017	$192,000
Dividend Revenue - 2018	$156,000
Gain on sale of investments	$334,000
Net increase in equity	$682,000