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Problem 1 Gregory Corp. acquired 20% of the 40,000 shares of common stock of Harrison Corp. at a total cost of $23 per share

problems 1 & 2 go together

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Answer #1
1.
a.
Gregory Corp - Journal entries under equity method
Date Account Title and Explanation Debit Credit
Mar 1,2019 Investment in Harrison Corp $184,000
Cash $184,000
(to record purchase of 8,000 equity shares of Harrison Corp at $ 23
per share)
Nov 1,2019 Dividend Received $52,000
Investment in Harrison Corp $52,000
(to record the dividend received from Harrison Corp.)
Dec.31,2019 Equity Income $5,000
Investment in Harrison Corp $5,000
(to record the share of loss of Harrison Corp)
b.
The total impact on 2019 net income is $ 5,000 decrease.
c.
Date Account Title and Explanation Debit Credit
Jan 2,2019 Cash $26,000
Gain on Investment in Harrison Corp $10,125
Investment in Harrison Corp $15,875
(to record the sale of 1,000 equity shares of Harrison Corp.)
Working Notes
Total equity share in Harrison Corp $40,000
Equity shares purchased by Gregory Corp 20%
Equity shares purchased by Gregory Corp $8,000
Purchase Price per share $23
Cost of investment $184,000
Total dividend declared by Harrison Corp $260,000
Share of Gregory Corp 20%
Share of Gregory Corp $52,000
Net loss reported by Harrison Corp for 2019 $25,000
Share of Gregory Corp 20%
Share of Gregory Corp $5,000
Value of Investment of Gregory Corp on Jan 02
Initial purchase value of investment $184,000
Less: Dividend received on investment ($52,000)
Less: Share of loss of Harrison Corp ($5,000)
Net Value of Investment $127,000
Number of equity shares          8,000
Investment cost per share $15.875
Cost of 1,000 equity shares $15,875
2
a.
Gregory Corp - Journal entries under fair value method
Date Account Title and Explanation Debit Credit
Mar 1,2019 Equity Investment $184,000
Cash $184,000
(to record purchase of 8,000 equity shares of Harrison Corp at $ 23
per share)
Nov 1,2019 Cash $52,000
Dividend Income $52,000
(to record the dividend received from Harrison Corp.)
Dec.31,2019 Unrealized loss on equity investment $24,000
Equity Investment $24,000
(to record the equity investment at it's fair market value)
b.
The total impact on 2019 net income is $ 24,000 decrease.
c.
Date Account Title and Explanation Debit Credit
Jan 2,2019 Cash $26,000
Gain on sale of equity investment $6,000
Equity Investment $20,000
(to record the sale of 1,000 equity shares of Harrison Corp.)
Working notes
Computation of unrealized loss on investment
Fair market value per share of Harrison Corp on Dec 31,2019 $20
Purchase price per share of investment in Harrison Corp $23
Unrealized loss per share ($3)
Total number of equity shares of Harrison Corp. held by Gregory Corp $8,000
Unrealized loss on investment for Gregory Corp on Dec 31,2019 ($24,000)
Computation of gain on sale of investment on Jan 02
Sales price of equity shares of Harrison Corp. sold by Gregory Corp. $26
Cost of one equity share of Harrison Corp. in the books of Gregory
Corp. after making the year end adjustment
$20
Gain per equity share $6
Number of equity shares sold          1,000
Total gain on sale of investment $6,000
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