Question

SHOW work a. Prepare the journal entry to record the acquisition of the investments. b. Prepare the journal entry to record the end of Year 1 fair value adjustment. c. Assume that Wildwing sells 19,100 ALP Company shares for $12 per share at the beginning of Year 2. Prepare the journal entry required to record the sale. Wildwing does not correct the fair value adjustment account at this time. d. Prepare the journal entry to record the end of Year 2 fair value adjustment. e. What is the effect of these investments on earnings in Years 1 and 2? ALP Description Number of shares Market price per share Spath Brothers 16,000 xS 28 Company 23,100 x$ $ 346,500 Share acquisition price $ 448.000 ALP Fair value, Fair Value End of year 1 End of year 2 Spath Brothers $ 19 $ 27 Brothers Company $ 17 $ 24

Answer 1

Transaction	Accounts	Debit	Credit
a.	Equity investment ($448000 + $346500)	794500
	Cash		794500
	(To record the acquisition of the investments)
b.	Unrealized gain/loss-Net income	97800
	Fair value adjustment*		97800
	(To record the fair value adjustment)
c.	Realized gain/loss [19100 x ($12 - $15)]	57300
	Cash (19100 x $12)	229200
	Equity investment-cost (19100 x $15)		286500
	(To record the sale of investments)
d.	Fair value adjustment	117800
	Unrealized gain/loss-Net income		117800
	(To record the fair value adjustment)

Workings:

	Year 1
Fair value [(16000 x $19) + (23100 x $17)]	696700
Cost	794500
Fair value adjustment (credit)	-97800
	Year 2
Fair value [(16000 x $27) + (4000 x $24)]	528000
Cost ($794500 - $286500)	508000
Fair value adjustment required (debit)	20000
Existing balance in fair value adjustment (credit)	97800
Fair value adjustment required (debit)	117800

e.

Effect on earnings:	Year 1	Year 2
Increase (decrease) in earnings	-97800	60500