Question

ranst estme PROBLEMS: 1. Bain Town Raptors was incorporated on Jan. 1, 2014 to produce and sell carnival designs and costumes. The following transactions relate to certain securities acquired by Bain Town Raptors, which has a fiscal year ending on December 31: 2014 Feb. 10. Purchased 8,000 shares of the 150,000 outstanding shares of Island Luck Corporation at $36 per share. The brokerage commission amounted to $864. July 15. Received a cash dividend of $2.25 per share from Island Luck Corporation Dec. 31. An adjust ing entry was made to recognize that the market value of Island Luck was $33 per share. 2015 Jan. 3. Obtained significant influence in Quick Draw Inc. by purchasing 30,000 of the 100,000 shares outstand ing, directly from the Gaming Board for $675,000. Apr.14. Received a cash dividend of $1 .10 per share and a 2% stock divid end from Island Luck Corp. July26. Sold 1,000 shares of Island Luck for $32 per share. The brokerage commission amounted to $125. Dec 15, Received a cash dividend of $1.20 per share on the Island Luck stock Dec 31. (a) Received a cash dividend of 40 cents per share from Quick Draw (b) An adjusting entry was made to recognize that Quick Draw reported a net loss of $325,000 for 2015 (c) An adjusting entry was made to recognize that the market value of Island Luck had increased to $38 per share. Instructions: Journalize the above transactions (Show all workings) (17 pts.)

Answer 1

2,88,000 864 10-02-2014 Equity investments-fair value method (8000*36) Brokerage commission Cash (Purchase of 8,000 shares of Island Luck Corporation) 2,88,864 18,000 15-07-2014 Cash Dividend income (2.25*8000) (Receipt of cash dividend) 18,000 24,000 31-12-2014 Decrease in fair value [(36-33)*8000) Equity investments-fair value adjustment 24,000 6,75,000 03-01-2015 Investments in Quick Draw Inc.-equity method Cash (Obtaining significant influence in Quick Draw Inc.) 6,75,000 (Obtaining significant in 8,000 14-04-2015 Cash (1.1*8000) Dividend income 8,000 32,000 1,000 26-07-2015 Cash (32*1000) Loss on sale [ 33-32) *1000] Equity investments (Sale of 1000 shares of Island Luck) 33,000

125 125 26-07-2015 Brokerage commission Cash (Brokerage commission on above sale of shares) 15-12-2015 Cash Dividend income (1.2*7000) (Cash dividend of $1.2 per share received) 8,400 8,400 12,000 31-12-2015 Cash (0.4*30000) Investments in Quick Draw Inc.-equity method (Cash dividend received from Quick Draw Inc.) 12,000 97,500 31-12-2015 Share in net loss of Quick Draw Inc. (30%"325000) Investments in Quick Draw Inc.-equity method (Recognition of share in net loss of Quick Draw Inc.) 97,500 31-12-2015 Equity investments-fair value adjustment 35,000 Unrealised gain on equity investment [(38-33) * 7000] 35,000 WORKINGS Investment in the shares of Island Luck Corporation makes the holding of Bain Town Raptors to 5.33% (8000/150000), indicating that it has a passive interest in Island Luck Corporation. Thus, such investments should be accounted for using fair value method. It has been given in the question that Bain Town Raptors has obtained significant influence in Quick Draw Inc., hence such investments should be accounted for using equity method. Stock dividends are very similar to stock splits and are recorded by moving amounts from retained earnings to paid in capital as there is no cash involved in case of stock dividend.