Question

Exercise 17-16 Stellar Inc. acquired 20% of the outstanding common stock of Theresa Kulikowski Inc. on December 31, 2020. The purchase price was $1,310,000 for 52,400 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 $667,000 for 2021. The fair value of Kulikowski’s stock was $28 per share at December 31, 2021. Assume that the security is a trading security. Prepare the journal entries for Stellar Inc. for 2020 and 2021, assuming that Stellar cannot exercise significant influence over Kulikowski.

Answer 1

When there is no significant influence, the investment shall be shown in books at fair value i.e. market value. Such securities are valued as available for sale securities

Date	Particulars	Debit ($)	Credit ($)
Dec 31,2020	Available for sale securities- Kulikowski	1310,000
	Cash		1310,000
	(To record the investment)
June 30,2021	Cash (52,400 X 0.75)	39,300
	Dividend income		39,300
	(To record the dividend receipt)
Dec 31,2021	Cash (52,400 X 0.75)	39,300
	Dividend income		39,300
	(To record the dividend receipt)
Dec 31,2021	Securities fair value adjustment	157,200
	Unrealized holding gain		157,200
	(fair value = 28*52400 = 1467,200 Gain = 1467,200 – 1310,000)
	(To record fair value adjustment)

Instead of AFS-kulikowski- Equity investments account can be debited alternatively