Question

Pearl Inc. acquired 20% of the outstanding common stock of Theresa Kulikowski Inc, on December 31, 2020. The purchase price was $1,294,800 for 49,800 shares. Kulikowski Inc. declared and paid an $0.75 per share cash dividend on June 30 and on December 31, 2021. Kulikowski reported net income of $764,000 for 2021. The fair value of Kulikowski's stock was $29 per share at December 31, 2021. Assume that the security is a trading security. Prepare the journal entries for Pearl Inc. for 2020 and 2021, assuming that Pearl cannot exercise significant influence over Kulikowski. (Credit account titles are automatically indented when amount is entered. Do not indent manually. If no entry is required, select "No Entry" for the account titles and enter for the amounts.)

Answer 1

Answer:

a)

Date	Account titles and Explanation	Debit ($)	Credit ($)
Dec.31,2020	Equity Investments (Available-for-Sale)	1,294,800
	Cash		1,294,800
June 30,2021	Cash (49800 shares * $0.75)	37,350
	Dividend Revenue		37,350
Dec. 31, 2021	Cash (49800 shares * $0.75)	37,350
	Dividend Revenue		37,350
	Fair Value Adjustment (Available-for-Sale)	149,400
	Unrealized Holding Gain or Loss - Equity*		149,400

*Unrealized Holding Gain or Loss - Equity-

	Amount ($)
Cost	1,294,800
Fair Value (49,800 shares * $29)	1,444,200
Unrealized Gain or (Loss)	149,400

b)

Date	Particulars	Debit ($)	Credit ($)
Dec.31,2020	Equity Investments (Kulikowski Stock)	1,294,800
	Cash		1,294,800
June 30,2021	Cash (49800 shares * $0.75)	37,350
	Equity Investment (Kulikowoski Stock)		37,350
Dec. 31, 2021	Cash (49800 shares * $0.75)	37,350
	Equity Investments (Kulikowski)		37,350
dec 31, 2021	Equity Investment (Kulikowski Stock)	152,800
	Revenue from Investments (764000 * 20%)		152,800

c)

Reporting of investment in securities on the balance sheet:
Fair value method = (1294800+149400) = 1444200
Equity method = (1294800-37350-37350+152800) = 1372900
Reporting on net income on the income statement:
Fair value method = Dividend Revenue = (37350+37350)= 74700
Equity meethod = Revenue from investments = 152800