Question

Question 7

On January 3,2020, Pina Colada Limited purchased 1,900 (19%) of the common shares of Sonja Corp. for $329,840. The following information is provided about the identifiable assets and liabilities of Sonja at the date of acquisition:

	Carrying Amount	Fair Value
Assets not subject to depreciation	$504,000	$504,000
Assets subject to depreciation (10 years remaining)	814,000	1,044,000
Total identifiable assets	1,318,000	1,548,000
Liabilities	82,000	82,000

 During 2020, Sonja reported the following information on its statement of comprehensive income: 

Income before discontinued operations    $172,000

Discontinued operations (net of tax)        (57,400)

Net income and comprehensive income   114,600

Dividends declared and paid by Sonja November 15,2020  72,000

Assume that the 19% interest is enough to make Sonja an associate of Pina Colada, and that Pina Colada is required to apply IFRS for its financial reporting. The fair value of Sonja's shares at December 31, 2020, is $152 per share. 

Prepare the journal entry to record Pina Colada's purchase of the Sonja shares on January 3, 2020. (Hint: Any unexplained payment represents unrecognized goodwill of Sonja.) 

Prepare all necessary journal entries associated with Pina Colada's investment in Sonja for 2020. Depreciable assets are depreciated on a straight-line basis. 

Prepare the journal entry if you were informed that Pina Colada's long-term business prospects had deteriorated and that the most Pina Colada could expect to recover in the future or to sell its investment in Sonja for at December 31, 2020, is $118 per share.

Answer 1

Journal Entries to record purchase of shares by Pina colada:

Investment a/c Dr $329,840

To Cash a/c $329,840

Purchase of 1900 (19%) common shares of Sonja Corp. on Jan 3 2020.

Explanation:

As Pina Colada has purchased  1900 (19%) shares of Sonja Corp for $329,840. We have Debited Investment a/c because purchase of shares in other company increases the investment of Pina Colada and it has paid $329,840 for the purchase which would have reduced its cash balance hence we have credited it.

Journal Entries to Record Dividend Collected:

Nov 15 2020	Cash a/c Dr	$13,680
	To Dividend Income a/c		$13,680

Explanation:

Sonja Corporation declared and paid Dividend of $72,000 on Nov 15 2020. We are recording Journal entries in the books of Pina Colada. Then Pina colada would have received dividend on Nov 15 for 19% of the shares held by them.

If Sonja declared $72,000 as Dividend then Pina Colada would have received 19% of it as dividend because it holds 19% of the shares. Hence Dividend received by Pina Colada = $72000*19% = $13,680.

Journal Entries to record Sale of Shares by Pina Colada:

Dec 31 2020	Cash a/c dr	$224,200
	To Investment a/c		$224,200

Explanation:

On Dec 31 2020, the business prospects of Pina Colada has detoriated and it has to sell its sonja corp sahres for $118 per share. It had total of 1900 Shares so the sale value is $118*1900 = $224,200. As the Sale of shares decreases the investment we are crediting it and Cash is received on sale of share so it is debited.