Question

Blue Inc. acquired 20% of the outstanding common stock of Theresa Kulikowski Inc. on December 31, 2020. The purchase price was $1,111,200 for 46,300 shares. Kulikowski Inc. declared and paid an $0.80 per share cash dividend on June 30 and on December 31, 2021. Kulikowski reported net income of $788,000 for 2021. The fair value of Kulikowski’s stock was $27 per share at December 31, 2021. Assume that the security is a trading security.

Prepare the journal entries for Blue Inc. for 2020 and 2021, assuming that Blue 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 0 for the amounts.)

2.  Prepare the journal entries for Blue Inc. for 2020 and 2021, assuming that Blue can 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 0 for the amounts.)
3. At what amount is the investment in securities reported on the balance sheet under each of these methods at December 31, 2021? What is the total net income reported in 2021 under each of these methods?

Blue Inc. acquired 20% of the outstanding common stock of Theresa Kulikowski Inc. on December 31, 2020. The purchase price was $1,111,200 for 46,300 shares. Kulikowski Inc, declared and paid an $0.80 per share cash dividend on June 30 and on December 31, 2021. Kulikowski reported net income of $788,000 for 2021. The fair value of Kulikowski's stock was $27 per share at December 31, 2021. Assume that the security is a trading security. Prepare the journal entries for Blue Inc. for 2020 and 2021, assuming that Blue 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 0 for the amounts.) Date Account Titles and Explanation Debit Credit > (To record dividend.) (To record fair value.)

Answer 1

Requirement A: Prepare the following journal entries using the fair value method.

Date	Account Title and Explanation	Debit	Credit
Dec 31, 2020	Equity investments	$1,111,200
	Cash		$1,111,200
	To record purchase of equity investments in TK Inc
June 30, 2021	Cash (46,300 shares × $0.80 per share)	$37,040
	Dividend Revenue		$37,040
	To record dividend income received
Dec 31, 2021	Cash (46,300 shares × $0.80 per share)	$37,040
	Dividend Revenue		$37,040
	To record dividend income received
Dec 31, 2021	Fair value adjustment (46,300×$27) ─ $$1,111,200	$138,900
	Unrealized Holding Gain —Income		$138,900
	to record unrealized gain on investments

Requirement B: Prepare the following journal entries using the equity method.

Date	Account Title and Explanation	Debit	Credit
Dec 31, 2020	Equity investments - TK Inc.	$1,111,200
	Cash		$1,111,200
	To record purchase of equity investments
June 30, 2021	Cash (46,300 shares × $0.80 per share)	$37,040
	Equity investments - TK Inc.		$37,040
	To record dividend received
Dec 31, 2021	Cash (46,300 shares × $0.80 per share)	$37,040
	Equity investments - TK Inc.		$37,040
	To record dividend received
Dec 31, 2021	Equity investments - TK Inc. (788,000 × 20%)	$157,600
	Investment income		$157,600
	To record 20% of income in TK Inc.

Requirement C: Report the items in income statement and balance sheet as follows

Particulars	Method
Fair Value	Equity
Balance Sheet
Investment amount	$1,250,100	$1,194,720
Income statement:
Dividend revenue ($37,040 + $37,040)	$74,080
Unrealized holding gain	$138,900
Investment income		$157,600

Note: Fair value method-investment amount is $1,250,100 (46,300 × $27)

Equity method-investment amount is $1,194,720 ($1,111,200 + $157,600 ─ $37,040 ─ $37,040)