Question

Selk Steel Co., which began operations in Year 1, had the following transactions and events in its long- term investments. Problem 15-5A Accounting for long-term investments in stock with significant influence Year 1 Jan. 5 Selk purchased 60,000 shares (20% of total) of Kildaire's common stock for $1,560,000. Oct. 23 Kildaire declared and paid a cash dividend of $3.20 per share. Dec. 31 Kildaire's net income for the year is $1,164.000, and the fair value of its stock at December 31 is $30.00 per share. Year 2 Oct. 15 Dec. 31 Kildaire declared and paid a cash dividend of $2.60 per share. Kildaire's net income for the year is $1,476,000, and the fair value of its stock at December 31 is $32.00 per share. Year 3 Jan. 2 Selk sold 3% (equal to 1,800 shares) of its investment in Kildaire for $54,200 cash. Required Prepare journal entries to record these transactions and events for Selk. Assume that Selk has a significant influence over Kildaire with its 20% share of stock. 1 45 GA

Answer 1

Solution:

Date	Accounts and Explanation	Debit	Credit
Jan. 5	Equity Investment-Kildaire`s	$          1,560,000
	Cash		$     1,560,000
	(To record securities purchased)
Oct. 23	Cash(60000*3.2)	$              192,000
	Equity Investment-Kildaire`s		$        192,000
	( To record dividend revenue earned)
Dec. 31	Equity Investment-Kildaire`s (1164000*20%)	$              232,800
	Equity Income		$        232,800
	( To record net income earned)
Oct. 15	Cash (60000*2.6)	$              156,000
	Equity Investment-Kildaire`s (1164000*20%)		$        156,000
	( To record dividend revenue earned)
Dec. 31	Equity Investment-Kildaire`s (1476000*20%)	$              295,200
	Equity Income		$        295,200
	( To record net income earned)
Jan. 2	Cash	$                54,200
	Gain on sale of equity investment-kildaire`s		$             2,000
	Equity Investment-Kildaire`s(1800*29)		$           52,200
	( To record net income earned)

Working:

1) Calculation of Carrying Amount.

Particulars	Amount $
Purchase Price	$          1,560,000
Less: Dividend Year 1	$            (192,000)
Less: Dividend Year 2	$            (156,000)
Add: Net Income Year 1	$              232,800
Add: Net Income Year 2	$              295,200
Carrying Amount	$          1,740,000
Total Shares	60000
Carrying Value per share(1740000/60000)	$                         29
Sold Shares Carrying Value(1800*29)	$                52,200