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22nd Edition
ISBN: 9780077632878
Author: Wild
Publisher: MCG
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Chapter 15, Problem 4APSA

Requirement 1

To determine

To prepare:

Journal entries to record the transactions and events given for Selk

Requirement 1

Expert Solution
Check Mark

Answer to Problem 4APSA

Solution:

    DateAccounts Titles and DescriptionsDebitCredit
    2015



    Jan-05
    Equity Investment − Kildarie
    1,560,000


    Cash

    1,560,000

    (To purchase common shares of Kildarie's)






    Oct-23
    Cash
    192,000


    Equity Investment − Kildarie

    192,000

    (To record the receipt of dividends from Kildarie.)






    Dec-31
    Equity Investment − Kildarie
    232,800


    Equity Investment Income

    232,800

    (To record Kildarie's reported income)






    2016



    Oct-15
    Cash
    156,000


    Equity Investment Income

    156,000

    (To record the receipt of dividends from Kildarie.)






    Dec-31
    Equity Investment − Kildarie
    295,200


    Equity Investment Income

    295,200

    (To record Kildarie's reported income)






    2018



    Jan-02
    Cash
    1,894,000


    Equity Investment − Kildarie

    1,740,000

    Gain on Sale of Investment

    154,000

    (To record sale of Equity Investment − Kildarie)


Explanation of Solution

The above journal entries can be explained as under −
For the year 2015 −
Jan. 5 − The common shares of Kildarie have been purchased for $ 1,560,000. Thus, Equity Investment − Kildarie for shares have been debited and cash has been credited for $ 1,560,000
Oct. 23 − Kildarie paid dividends of $ 3.20 per share. The dividends on Kildarie for Montero Co. will be calculated as under −

  Selks dividends = Dividends paid X Selks shares in KildarieSelks dividends =$3.20 X 60000 sharesSelks dividends =$192,000

Since, dividends are received, they will be credited or subtracted from the Equity Investment − Kildarie account.
Dec. 31 − the net income of Kildarie is $ 1,164,000 for the year. The net income due to Selk will be added to Kildarie investment account.
The net income of Kildarie for Selk. will be calculated as under −

  Selks net income=NetIncome X Selks shares in KildarieSelks net income=$1,164,000 X 20 %Selks net income =$232,800

Thus, the net income is added to Equity Investment − Kildarie account.
For the year 2016 −
Oct. 15 − Kildarie paid dividends of $ 2.60 per share. The dividends on Kildarie for Selk will be calculated as under −

  Selks dividends = Dividends paid X Selks shares in KildarieSelks dividends =$2.60 X 60000 sharesSelks dividends =$156,000

Since, dividends are received, they will be credited or subtracted from the Equity Investment − Kildarie account.
Dec. 31 − the net income of Kildarie is $ 1,476,000 for the year. The net income due to Selk will be added to Kildarie investment account.
The net income of Kildarie for Selk. will be calculated as under −

  Selks net income=NetIncome X Selks shares in KildarieSelks net income=$1,476,000 X 20 %Selks net income =$295,200

Thus, the net income is added to Equity Investment − Kildarie account.
For the year 2017 −
Jan. 02 − the sale of investment for $ 1,894,000
Given,

  • The shares are sold for = $ 1,894,000
  • Carrying value of shares −
  • Purchase price of shares = $ 1,560,000
  • Net income for year 2015 = $ 232,800
  • Net income for year 2016 = $ 295,200
  • Dividend for 2015 = $ 192,000
  • Dividend for 2016 = $ 156,000

  •    Carrying value of investment = Purchase price of shares + ( Net income for year 2015  + Net income for year 2016 )                                                    ( Dividend for 2015  + Dividend for 2016 )Carrying value of investment = $ 1,560,000 + ( $ 232,800 + $ 295,200)  ( $ 192,000 + $156,000)Carrying value of investment = $ 1,740,000

Now, gain will be calculated as −

  Gain on sale = Sale price of investment  Carrying value of investmentGain on sale = $ 1,894,000  $ 1,740,000Gain on sale = $ 154,000

The cash will be debited with the sale amount of $ 1,894,000. The Equity Investment − Kildarie will be credited with $ 1,740,000 and the gain on sale of investment will be credited with $ 154,000.

Conclusion

Thus, all the journal entries have been prepared.

Requirement 2

To determine

To compute:

Carrying (Book) value per share of Selk’s Investment in Kildarie common stock

Requirement 2

Expert Solution
Check Mark

Answer to Problem 4APSA

Solution:

The carrying (Book) value per share of Selk’s Investment in Kildarie common stock = $ 29 per share.

Explanation of Solution

The above answer can be explained as under −
Given,

  • Carrying value of investment = $ 1,740,000 (explained in requirement 1)
  • Number of shares purchased = 60,000 shares

  •   Carrying ( Book) value per share =  Carrying value of investment  Number of shares purchased Carrying ( Book) value per share =  $ 1,740,000  60,000 shares Carrying ( Book) value per share = $ 29 per share

Conclusion

Thus, the carrying (Book) value per share has been calculated.

Requirement 3

To determine

To compute:

Net Increase or decrease in Selk’s equity from January 5, 2017 through January 2, 2017

Requirement 3

Expert Solution
Check Mark

Answer to Problem 4APSA

Solution:

The net Increase in Selk’s equity from January 5, 2017 through January 2, 2017 = $ 682,000

Explanation of Solution

The above answer can be explained as under −
Given,

  • Earnings from Kildarie − 2015 = $ 232,800
  • Earnings from Kildarie − 2016 = $ 295,200
  • Gain on sale of Investment = $ 154,000

  •   Net increase = ( Earnings from Kildarie  2015  + Earnings from Kildarie  2016 ) + Gain on sale of InvestmentNet increase = $ 232,800 + $ 295,200 + $ 154,000Net increase = $ 682,000

Conclusion

Thus, the net Increase in Selk’s equity from January 5, 2017 through January 2, 2017 has been determined.

Part 2 − Investments as Available for Sale Investments

Requirement 1

To determine

To prepare:

Journal entries to record the transactions and events given for Selk

Requirement 1

Expert Solution
Check Mark

Answer to Problem 4APSA

Solution:

    Date
    Accounts Titles and Descriptions
    Debit
    Credit
    2015



    Jan-05
    Long term Investment - Kildarie (AFS)
    1,560,000


    Cash

    1,560,000

    (To record purchase of shares of Kildarie)






    Oct-23
    Cash
    192,000


    Dividend revenue

    192,000

    (To record receipt of dividend revenue)






    Dec-31
    Market Adjustment - AFS
    240,000


    Unrealized Gain - AFS equity

    240,000

    (To record unrealized loss on the AFS securities)






    2016



    Oct-15
    Cash
    156,000


    Dividend revenue

    156,000

    (To record receipt of dividend revenue)






    Dec-31
    Market Adjustment - AFS
    120,000


    Unrealized Gain - AFS equity

    120,000

    (To record unrealized loss on the AFS securities)






    2017



    Jan-02
    Cash
    1,894,000


    Long term Investment - Kildarie (AFS)

    1,560,000

    Gain on Sale of Investment

    334,000

    (To record sale of AFS investment)






    Jan-02
    Unrealized Gain - AFS equity
    360,000


    Market Adjustment − AFS

    360,000

    (To record unrealized gain transferred to adjustment account)


Explanation of Solution

The above journal entries can be explained as under −
For the year 2015 −
Jan. 05 − The common shares of Kildarie have been purchased for $ 1,560,000. Thus, Long term Investment - Kildarie (AFS) has been debited and cash has been credited for $ 1,560,000
Oct. 23 − The dividend is received on Kildarie’s Stock for $ 3.20 per share. The dividend is calculated as under −

   Dividend received = Number of shares X Dividend per share Dividend received = 60,000 shares X $ 3.20 per shareDividend received = $ 192,000

Thus, the cash received will be debited and the dividend revenue will be credited.
Dec. 31 − The fair value per share of Kildarie is $ 32. The total fair value will be calculated as −

  Total fair value = Number of shares X Fair value per shareTotal fair value = 60,000 shares X $ 30Total fair value = $ 1,800,000

  • Cost price of shares = $ 1,560,000
  • The gain on fair value of shares will be calculated and adjusted as −

      Unrealized gain = Total fair value  Cost price per shareUnrealized gain = $ 1,800,000  $ 1,560,000Unrealized gain = $ 240,000

The unrealized gain will be credited and Market Adjustment − AFS will be debited with $ 240,000.
For the year 2016 −
Oct. 15 − The dividend is received on Kildarie’s Stock for $ 2.60 per share. The dividend is calculated as under −

  Dividend received = Number of shares X Dividend per shareDividend received = 60,000 shares X $ 2.60 per shareDividend received = $ 156,000

Thus, the cash received will be debited and the dividend revenue will be credited.
Dec. 31 − The fair value per share of Kildarie is $ 32. The total fair value will be calculated as −

  Total fair value = Number of shares X Fair value per shareTotal fair value = 60,000 shares X $ 32Total fair value = $ 1,920,000

  • Cost price of shares = $ 1,800,000
  • The gain on fair value of shares will be calculated and adjusted as −

      Unrealized gain = Total fair value  Cost price per shareUnrealized gain = $ 1,920,000  $ 1,800,000Unrealized gain = $ 120,000

The unrealized gain will be credited and Market Adjustment − AFS will be debited with $ 120,000.
For the year 2017 −
Jan. 02 − The shares are sold for $ 1,894,000. The cost price of the shares was $ 1,560,000.
Now, gain will be calculated as −

  Gain on sale = Sale price of investment  Carrying value of investmentGain on sale = $ 1,894,000  $ 1,560,000Gain on sale = $ 334,000

The cash will be debited with the sale amount of $ 1,894,000. The Long term Investment - Kildarie (AFS) will be credited with $ 1,560,000 and the gain on sale of investment will be credited with $ 334,000.
In the next entry, the unrealized gain is debited with $ 360,000 (i.e. $ 240,000 + $ 120,000) and the Market Adjustment − AFS is credited with $ 360,000.

Conclusion

Thus, all the journal entries have been prepared.

Requirement 2

To determine

To compute:

Carrying (Book) value per share of Selk’s Investment in Kildarie common stock

Requirement 2

Expert Solution
Check Mark

Answer to Problem 4APSA

Solution:

The carrying (Book) value per share of Selk’s Investment in Kildarie common stock = $ 29 per share.

Explanation of Solution

The above answer can be explained as under −
Given,

  • Carrying value of investment = $ 1,560,000
  • Number of shares purchased = 60,000 shares

  •   Carrying ( Book) value per share =  Carrying value of investment  Number of shares purchased Carrying ( Book) value per share =  $ 1,560,000  60,000 shares Carrying ( Book) value per share = $ 26 per share

Conclusion

Thus, the carrying (Book) value per share has been calculated.

Requirement 3

To determine

To compute:

Net Increase or decrease in Selk’s equity from January 5, 2017 through January 2, 2017

Requirement 3

Expert Solution
Check Mark

Answer to Problem 4APSA

Solution:

The net Increase in Selk’s equity from January 5, 2017 through January 2, 2017 = $ 682,000

Explanation of Solution

The above answer can be explained as under −
Given,

  • Earnings from Kildarie − 2015 = $ 232,800
  • Earnings from Kildarie − 2016 = $ 295,200
  • Gain on sale of Investment = $ 154,000

  •   Net increase = ( Earnings from Kildarie  2015  + Earnings from Kildarie  2016 ) + Gain on sale of InvestmentNet increase = $ 232,800 + $ 295,200 + $ 154,000Net increase = $ 682,000

Conclusion

Thus, the net Increase in Selk’s equity from January 5, 2017 through January 2, 2017 has been determined.

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