Question

er 15 Investments and Fair Value Accounting PR 15-3B Stock investment transactions, equity method and available-for-sale 03.3.4 securities Glacier Products Inc. is a wholesaler of rock climbing gear. The company began operations on January 1, 2016. The following transactions relate to securities acquired by Glacier Products Inc., which has a fiscal year ending on December 31: 2016 Jan. 18. Purchased 9,000 shares of Malmo Inc. as an available for sale investment at $40 per share, including the brokerage commission. July 22. A cash dividend of $3.00 per share was received on the Malmo stock. Oct. 5. Sold 500 shares of Malmo Inc. stock at $58.00 per share, less a brokerage commission of $100. Dec. 18. Received a regular cash dividend of $3.00 per share on Malmo Inc. stock. 31. Malmo Inc. is classified as an available-for-sale investment and is adjusted to a fair value of $36.00 per share. Use the valuation allowance for available-for-sale investments account in making the adjustment. 2017 Jan. 25. Purchased an influential interest in Helsi Co. for $800,000 by purchasing 75,000 shares directly from the estate of the founder of Helsi. There are 250,000 shares of Helsi Co. stock outstanding. July 16. Received a cash dividend of $3.00 per share on Malmo Inc. stock. Dec. 16. Received a cash dividend of $3.00 per share plus an extra dividend of $0.20 per share on Malmo Inc. stock. 31. Received $38,000 of cash dividends on Helsi Co. stock. Helsi Co. reported net income of $170,000 in 2015. Glacier Products Inc. uses the equity method of accounting for its investment in Helsi Co. 31. Malmo Inc. is classified as an available for sale investment and is adjusted to a fair value of $44 per share. Use the valuation allowance for available-for-sale investments account in making the adjustment for the increase in fair value from $36 to $44 per share. Instructions 1. Journalize the entries to record the preceding transactions. 2. Prepare the investment-related asset and stockholders' equity balance sheet presenta tion for Glacier Products Inc. on December 31, 2017, assuming the Retained Earnings balance on December 31, 2017, is $700,000.

Answer 1

1. Journal entries of transactions for the year 2016 and 2017

2016		Debit	Credit
Jan 18	Investment in Malmo shares	$360,000
	To Cash		$360,000
	(Being investment in shares of Malmo Ltd on purchase of 9000 shares at $40 per share including brokerage commission)
Jul 22	Cash	$27,000
	To Dividend Received from Malmo shares		$27,000
	(Being dividend receive in 9000 shares of Malmo Ltd purchased in Jan 2017 at $3 per share)
Oct 5	Cash	$28,900
	Brokerage Commission	$100
	To Investment in Malmo shares		$20,000
	To profit on sale of Malmo share		$9,000
	(Being sale of 500 Malmo Ltd shares at $58 per share which were purchased at $40 per share, reducing brokerage charge of $100 from cash received on sale)
Dec 18	Cash	$25,500
	To Dividend received from Malmo shares		$25,500
	(Being $3 per share dividend received on remaining 8,500 shares of Malmo Ltd )
Dec 31	Fair value adjustment of Malmo shares	$34,000
	To investment in Malmo shares		$34,000
	(Being fair value adjustment of 8,500 shares of Malmo Ltd i.e the difference between the purchase price of $40 per share and fair value at$36 per share)
2017
Jan 25	Investment in Associate Helsi Co shares	$800,000
	To Cash		$800,000
	(Being purchase of influential interest in Helsi Co. of 30% by purchasing 75,000 shares from out of 250,000 shares)
Jul 16	Cash	$25,500
	To Dividend Received from Malmo shares		$25,500
	(Being cash dividend of $3/- per share, received on 8,500 shares of Malmo Ltd)
Dec 16	Cash	$27,200
	to Dividend received on Malmo shares		$27,200
	(Being cash dividend of $3.2/- per share, received on 8,500 shares of Malmo Ltd)
Dec 31	Cash	$38,000
	To Investment in Associate Helsi Co. shares		$38,000
	(Being reduction in investment of Associate Helsi Co. as they have received dividend income from their investee, following equity method of accounting)
Dec 31	Investment in Associate Helsi Co. shares	$51,000
	To Investment Revenue		$51,000
	(Being 30% share in net income of $170,000 of Helsi company treated as investment in associate company, following equity method of accounting)
Dec 31	Investment in Malmo shares	$68,000
	To Fair value adjustment of Malmo shares		$68,000
	(Being fair value adjustment of 8,500 shares of Malmo Ltd i.e the difference between the 2016 fair value price of $36 per share and present fair value at$44 per share)

2) Investment related asset and stockholders equity balance sheet as on Dec 31,2017

Liability		Asset
Retained Earnings :		Investments :
Earnings from Associate Helsi Co	$39,600	Investment in Malmo shares	$374,000
Retained earnings of Glacier Products Inc	$660,400	Investment in Associate Helsi Co.	$813,000

Note : Retained earning of Associate Helsi company is calculated as follows.

Net income = $170,000

Less Dividend paid = $38,000

Balance = $132,000

30% of balance $132,000 is $39,600, which is the Glacier Products Inc. share of retained earnings of Associate Helsi Co.. The retained earnings of Glacier Products Inc is calculated by reducing Associate Helsi companies retained earnings share of $39,600 from total retained earning of the Glacier Products Inc i.e $700,000/-