Chapter 13, Problem 17P

1. a.

To determine

Prepare the journal entries to record the investment in shares transactions, using fair value method, and classify the securities as equity securities.

Explanation of Solution

Prepare the journal entries to record the investment in shares transactions, classify the securities as equity securities.

Record the purchase of Company G’s shares on January 1, 2019.

Step 1: Determine the number of shares purchased.

$\begin{array}{c}\text{Number of shares purchased=}\left[\begin{array}{l}\text{Company G's outstanding shares}\times \text{Percentage}\\ \text{of Company G's shares acquired by Corporation S}\end{array}\right]\\ =200,000\text{shares}\times 20\%\\ =40,000\text{shares}\end{array}$

Corporation S purchased 20% shares of Company G for $\left(40,000\text{shares}\times \$4\text{per share}\right)$ $160,000.

Step 2: Record the entry.

Date	Account Title and Explanation	Debit	Credit
January 1, 2019	Investment in Equity Securities	$160,000
	Cash		$160,000
	(To record the purchase of 20% shares of Company G)

Table (1)

Record the dividend income received on December 31, 2019.

Corporation S received $\left(\text{\$30,000 dividend declared by Company G×20\%shares held}\right)$ $6,000 dividend.

Date	Account Title and Explanation	Debit	Credit
December 31, 2019	Cash	$6,000
	Dividend income		$6,000
	(To record the amount of dividend income received from investment)

Table (2)

Record the unrealized gain or loss on equity securities, as on December 31, 2019.

Step 1: Determine the amount of unrealized holding loss or gain.

$\begin{array}{c}\begin{array}{l}\text{Unrealized holding}\\ \text{loss or gain}\end{array}\}\text{ =}\left[\begin{array}{l}\text{Number of shares purchased}\times \\ \left(\begin{array}{l}\text{Market value per share on December 31, 2018}\\ -\text{Purchase price per share}\end{array}\right)\end{array}\right]\\ =\left[40,000\text{shares}\times \left(\$3.80-\$4.00\right)\right]\\ =-\$8,000\left(\text{loss}\right)\end{array}$

Step 2: Record the adjusting entry.

Date	Account Title and Explanation	Debit	Credit
December 31, 2019	Unrealized holding gain or loss: Equity Securities	$8,000
	Investment in equity securities		$8,000
	(To record the unrealized holding loss on investment)

Table (3)

Record the dividend income received on December 31, 2020.

Corporation S received $\left(\text{\$35,000 dividend declared by Company G×20\%shares held}\right)$ $7,000 dividend.

Date	Account Title and Explanation	Debit	Credit
December 31, 2020	Cash	$7,000
	Dividend income		$7,000
	(To record the amount of dividend income received from investment)

Table (4)

Record the unrealized gain or loss on Equity Securities, as on December 31, 2020.

Step 1: Determine the amount of unrealized holding loss or gain.

$\begin{array}{c}\begin{array}{l}\text{Unrealized holding}\\ \text{loss or gain}\end{array}\}\text{ =}\left[\begin{array}{l}\text{Number of shares purchased}\times \\ \left(\begin{array}{l}\text{Market value per share on December 31, 2018}\\ -\text{Purchase price per share}\end{array}\right)\end{array}\right]\\ =\left[40,000\text{shares}\times \left(\$4.25-\$4.00\right)\right]\\ =\$10,000\left(\text{gain}\right)\end{array}$

Step 2: Determine the amount of allowance to be adjusted to have $10,000 debit balance in allowance account at the end of the year 2020, using T-account.

Credit balance in allowance account on December 31, 2019 is $8,000.

Table (5)

Step 3: Record the adjusting entry.

Date	Account Title and Explanation	Debit	Credit
December 31, 2020	Investment in equity securities	$18,000
	Unrealized holding gain or loss:         Equity Securities		$18,000
	(To adjust the unrealized holding gain on investment)

Table (6)

1. b.

To determine

Prepare the journal entries to record the investment in shares transactions, using equity method.

Explanation of Solution

Record the purchase of Company G’s 20% outstanding common stock:

Date	Account Title and Explanation	Debit	Credit
January 1, 2019	Investment in Stock: Company G	$160,000
	Cash		$160,000
	(To record the purchase of 20% shares of Company G)

Table (7)

Record the income from investment.

Step 1: Determine the amount of investment income.

$\begin{array}{c}\text{Investment income= }\left[\begin{array}{l}\text{Net income of the year 2015 reported by Company G}\times \\ \text{Percentage of Company G}\text{'}\text{s common stocks}\\ \text{acquired by Corporation S}\end{array}\right]\\ =\$80,000\times 20\%\\ =\$16,000\end{array}$

Step 2: Record the entry.

Date	Account Title and Explanation	Debit	Credit
December 31, 2019	Investment in Stock: Company G	$16,000
	Investment income		$16,000
	(To record the income earned from investment)

Table (8)

Record the receipt of dividend.

Step 1: Determine the amount of cash received as dividend.

$\begin{array}{c}\text{Cash = }\left[\begin{array}{l}\text{Amount of dividend declared by Company G}\times \\ \text{Percentage of Company G}\text{'}\text{s common stocks}\\ \text{acquired by Corporation S}\end{array}\right]\\ =\$30,000\times 20\%\\ =\$6,000\end{array}$

Step 2: Record the entry.

Date	Account Title and Explanation	Debit	Credit
December 31, 2019	Cash	$6,000
	Investment in Stock: Company G		$6,000
	(To record the receipt of cash dividend)

Table (9)

Record the income from investment.

Step 1: Determine the amount of investment income.

$\begin{array}{c}\text{Investment income= }\left[\begin{array}{l}\text{Net income of the year 2016 reported by Company G}\times \\ \text{Percentage of Company G}\text{'}\text{s common stocks}\\ \text{acquired by Corporation S}\end{array}\right]\\ =\$90,000\times 20\%\\ =\$18,000\end{array}$

Step 2: Record the entry.

Date	Account Title and Explanation	Debit	Credit
December 31, 2020	Investment in Stock: Company G	$18,000
	Investment income		$18,000
	(To record the income earned from investment)

Table (10)

Record the receipt of dividend.

Step 1: Determine the amount of cash received as dividend.

$\begin{array}{c}\text{Cash = }\left[\begin{array}{l}\text{Amount of dividend declared by Company G}\times \\ \text{Percentage of Company G}\text{'}\text{s common stocks}\\ \text{acquired by Corporation S}\end{array}\right]\\ =\$35,000\times 20\%\\ =\$7,000\end{array}$

Step 2: Record the entry.

Date	Account Title and Explanation	Debit	Credit
December 31, 2020	Cash	$7,000
	Investment in Stock: Company G		$7,000
	(To record the receipt of cash dividend)

Table (11)

Note: Under the equity method of recording the investment, no entry is required for recording the increase in the investee company’s market value.

2. a.

To determine

Prepare the journal entries to record the sale of 10,000 of Company G’s shares, assume that the company accounts for its investment as an Equity Securities.

Explanation of Solution

Record the sale of 10,000 shares of Company G for $4.30 per share on January 4, 2021.

Corporation S sold Company G’s shares and received cash of $43,000$\left(10,000\text{shares }\times \text{\$4}\text{.30per shares}\right)$.

Determine the investment in equity securities balance on the date of partial sale of shares.

$\begin{array}{c}\text{Investment in equity securities balance = \$160,000}-\$8,000+\$18,000\\ =\$170,000\end{array}$

Determine the cost of investment in equity securities sold on January 4, 2021.

$\begin{array}{c}\begin{array}{l}\text{Cost of investment in}\\ \text{equity securities}\\ \text{sold on January 4, 2021}\end{array}\}\text{ =}\left[\begin{array}{l}\left[\frac{\text{Number of shares sold}}{\text{Number of shares}\text{purchased in 2019}}\right]\times \\ \text{Investment in equity securities balance}\end{array}\right]\\ =\left[\frac{10,000\text{shares}}{40,000\text{shares}}\times \$170,000\right]\\ =\$42,500\end{array}$

Record the entry.

Date	Account Title and Explanation	Debit	Credit
January 4, 2021	Cash	$43,000
	Investment in equity securities		$42,500
	Gain on sale of investment		$500
	(To record the gain on sale of investment)

Table (12)

2. b.

To determine

Prepare the journal entries to record the sale of 10,000 of Company G’s shares, using equity method.

Explanation of Solution

Record the sale of 10,000 shares of Company G for $4.30 per share on January 4, 2021, under equity method.

Determine the balance in Corporation S’s investment account on January 4, 2021.

Table (14)

Record the realized gain or loss from sale of 10,000 shares of Company G.

Date	Account Title and Explanation	Debit	Credit
January 4, 2017	Cash	$43,000
	Loss on sale of equity investment	$2,250
	Investment in Stock: Company G		$45,250
	(To record the loss on sale of investment)

Table (15)