Prepare journal entries to record the given transaction of Company S.
Explanation of Solution
Journal entry is a set of economic events which can be measured in monetary terms. These are recorded chronologically and systematically.
Prepare the journal entries to record the given transactions as follows:
January 5, Year 1 – Purchase of Company K’s shares.
Date | Account Titles and Description | Post Ref. | Debit ($) | Credit ($) |
January 5, Year 1 | Stock Investments (Company K) | 1,560,000 | ||
Cash | 1,560,000 | |||
(To record the purchase of bonds) |
Table (1)
- Stock investment-Company K is an asset account, and it increases the value of assets by $1,560,000. Hence, debit the stock investment with $1,560,000.
- Cash is an asset account and it decreases the value of asset by $1,560,000. Therefore, credit the cash account for $1,560,000.
October 23, Year 1 – Dividend received from Company K.
Date | Account Titles and Description | Post Ref. | Debit ($) | Credit ($) |
October 23, Year 1 | Cash (1) | 192,000 | ||
Dividend revenue | 192,000 | |||
(To record the cash dividend received) |
Table (2)
- Cash is an asset account and it increases the value of asset by $192,000. Therefore, debit the cash account for $192,000.
- Dividend revenue is a component of owner’s equity (revenue), and it increases the value of equity by $192,000. Hence, credit dividend revenue account with $192,000.
Working note:
Calculate the dividend revenue received from Company K for the year 1:
December 31, Year 1 – Fair value adjustments:
Date | Account Titles and Description | Post Ref. | Debit ($) | Credit ($) |
December 31, Year 1 | Fair value adjustment- Company K | 240,000 | ||
Unrealized gain-income (3) | 240,000 | |||
(To record the unrealized gain) |
Table (3)
- Fair Value Adjustment is a contra-asset account. The account shows a credit balance since the market price has increased (gain); therefore, debit the fair value adjustment with $240,000.
- Unrealized gain–Income is an adjustment account to report the investment at fair market value. Since gain has occurred while adjusting; therefore, credit the unrealized Gain or Loss–income account with $240,000.
Working note:
Calculate the fair value of stock for the year 1:
Calculate the unrealized gain (loss) from sale of stock investment:
October 15, Year 2 – Cash dividend received from Company K.
Date | Account Titles and Description | Post Ref. | Debit ($) | Credit ($) |
October 15, Year 2 | Cash (4) | 156,000 | ||
Dividend revenue | 156,000 | |||
(To record the cash dividend received) |
Table (4)
- Cash is an asset account and it increases the value of asset by $156,000. Therefore, debit the cash account for $156,000.
- Dividend revenue is a component of owner’s equity (revenue), and it increases the value of equity by $156,000. Hence, credit dividend revenue account with $156,000.
Working notes:
Calculate the dividend revenue received from Company K for the year 2:
December 31, Year 2 – Fair value adjustments:
Date | Account Titles and Description | Post Ref. | Debit ($) | Credit ($) |
December 31, Year 2 | Fair value adjustment- Company K | 120,000 | ||
Unrealized gain-income (6) | 120,000 | |||
(To record the unrealized gain) |
Table (5)
- Fair Value Adjustment is a contra-asset account. The account shows a credit balance since the market price has increased (gain); therefore, debit the fair value adjustment with $120,000.
- Unrealized gain–Income is an adjustment account to report the investment at fair market value. Since gain has occurred while adjusting; therefore, credit the unrealized Gain or Loss–income account with $120,000.
Working note:
Calculate the fair value of stock for the year 2:
Calculate the unrealized gain (loss) from sale of stock investment:
January 2, Year 3 – Sale of equity investment:
Date | Account Titles and Description | Post Ref. | Debit ($) | Credit ($) |
January2, Year 3 | Cash | 54,200 | ||
Gain on sale of investment (7) | 7,400 | |||
Stock investment – Company K (8) | 46,800 | |||
(To record sale of investment and gain from sale of investment) |
Table (6)
- Cash is an asset account and it increases the value of asset by $54,200. Therefore, debit the cash account for $54,200.
- Gain on sale of trading is a component of owner’s equity (revenue), and it increases the value of equity by $7,400. Hence, credit the gain on sale of trading securities account with $7,400.
- Stock investment is an asset account, and it decreases the value of assets by $46,800. Hence, credit the stock investment account with $46,800.
Calculate the purchased value of shares:
Calculate the gain (loss) from sale of long-term investment:
Want to see more full solutions like this?
Chapter 15 Solutions
Principles of Financial Accounting.
- On July 7, Splish Ltd. purchased 1,100 common shares in a privately-owned company named TWR Ltd. As the TWR shares were not traded on any stock exchange, Splish elected to account for the investment using the cost method. The price of the shares was $7.51 per share, plus a 3% commission charged by the broker who arranged the purchase. On September 1, TWR Ltd. declared dividends of $0.63 per share, paid on September 30. On November 15, Splish sold 1,023 of the shares for $8.30 per share; again, there was a 2% commission on the sale. Prepare the journal entries on the books of Splish to record the above transactions.arrow_forwardJacobson Company is considering an investment in the common stock of Biltrite Company. What are the accounting issues surrounding the recording of income in future periods if Jacobson purchases: a. 15% of Biltrite’s outstanding shares. b. 40% of Biltrite’s outstanding shares. c. 100% of Biltrite’s outstanding shares. d. 80% of Biltrite’s outstanding shares.arrow_forwardFollowing is a list of investments owned by Martinez Ltd., as of the company’s year-end, December 31, 2020: Investment No. Shares Cost Fair Value HFX Corporation 1,200 $9.00 $8.20 FDY Ltd. 2,100 6.50 6.55 CTN Corporation 3,700 7.00 7.60 On January 15, 2021, Martinez sold the shares in CTN Corporation for $8.10 per share. Prepare the journal entries required to record the sale, assuming the company uses the fair value through other comprehensive income without recycling method. (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 Jan. 15, 2021 (To adjust to current fair value) (To record the sale of shares) (Reclassification…arrow_forward
- Landry owns 50 of 250 outstanding shares of Kelly Manufacturing corporation. How many of Landry’s shares must be redeemed in order for the redemption to qualify as disproportionate? Assume that Kelly Manufacturing corporation has $100,000 in current earnings & profits, has no accumulated e&p, and there were no dividends or other distributions this year. If Landry’s stock is redeemed for $15,000 on December 31, what is the effect on earnings and profits?arrow_forwardAdams Moving and Storage, a family-owned corporation, declared a property dividend of 2,000 shares of GE common stock that Adams had purchased in February for $94,000 as an investment. GE’s shares had a market value of $45 per share on the declaration date. Prepare the journal entries to record the property dividend on the declaration and payment dates. Record adjustment of stock to fair value. Record the journal entry on the declaration date. Record the journal entry on the payment date.arrow_forwardOn January 1, 20X8, Ball Corporation purchased shares of Leftwich Company common Stock. Assume the stock acquired by Ball represents 15% of Leftwich’s voting stock and that Ball has no influence over Leftwich’s business decisions. Use the financial statement effects template (with amounts and accounts) to record the following transactions. Ball purchased 5,000 common shares of Leftwich at $15 cash per share. Leftwich reported annual net income of $40,000. Ball received a cash dividend of $1.10 per common share from Leftwich. Year-end market price of Leftwich common stock is $19.00 per share. Assume that the stock acquired by Ball represents 30% of Leftwich’s voting stock and that Ball accounts for this investment using the equity method because it is able to exert significant influence. Use the financial statement effects template (with amounts and accounts) to record the following transactions. Ball purchased 5,000 common shares of Leftwich at $15 cash per share. Leftwich…arrow_forward
- Walton decided to issue additional new common stock. Mr. Adib Rahman, an individual investor purchased 100 shares of this stock from Munawar Associates, the underwriter. Would this transaction be a primary or a secondary market transaction? If Mr. Adib Rahman purchased previously outstanding Walton stock from another investor, then which financial market will this transaction be traded in?arrow_forwardAll of the stock in Green Corporation (E & P of $240,000) is held by three unrelated individuals as follows: Rashad has 15 shares, Keshia has 15 shares, and Jose owns 20 shares. Green Corporation redeems 10 of Jose’s shares (basis of $36,000) for $40,000. If Jose’s stock is a capital asset and has been held for the requisite holding period, he has a long-term capital gain of $4,000 Group of answer choices True Falsearrow_forwardIn each of the following independent situations, determine if the redemption of shares will be treated as an exchange or as a distribution. For situations 1 – 2, the ownership of a corporation is: Andy 40 shares Barb 20 shares Cindy 40 shares Situation 1: The corporation redeems 10 shares of stock held by Barb. Situation 2: The corporation redeems 30 shares of stock held by Cindy. Situation 3: The corporation redeems 15 shares of stock held by Andy. Situation 4: Same facts as Situation 1 except Andy is Barb’s father. To answer this be sure to first review the “Attribution Rules”arrow_forward
- On January 1, 2020, investor X has an investment in 20% of the investee’s outstanding shares at a cost of USD 370. The investee’s net assets on that date were USD 1,600 and there was no difference between the carrying amount and fair values of the investee’s assets and liabilities except for Land, which fair value was USD150 higher than the carrying amount. Investor X analyzed and concluded that it has significant influence over the investee. During 2020, the investee distributed dividend of USD 80 on April 1, reported net profit of USD 250 and recognized revaluation surplus of USD 30 on property, plant, and equipment. On December 31, 2020, the fair value of the investment held by investor X in the investee’s shares is USD 400. Required: 1. How much is the goodwill in investor A’s investment? 2. Prepare the journal entry(s) for investor A’s investment in the investee during 2020.arrow_forwardBonneau Company had the following transactions relating to investments in available-for-sale securities during the year. Prepare the required general journal entries for these transactions:July 4 Bonneau purchased 400 shares of Crossley Company stock at $120 per share plus a $400 brokerage fee. These stocks will be classified as Available-for-Sale securities.Sept 15 Bonneau received a $1.50 per share cash dividend on the Crossley Company stock.Dec 31 The fair value of the Crossley Company stock (the only investment that Bonneau owns) is $125 per share. The balance of the Fair value Adjustment—AFS account had a zero balance prior to adjustment.arrow_forwardFollowing is a list of investments owned by Ivanhoe Ltd., as of the company’s year-end, December 31, 2020: Investment No. Shares Cost Fair Value HFX Corporation 1,000 $8.00 $7.10 FDY Ltd. 3,000 6.90 6.95 CTN Corporation 4,600 5.00 5.80 On January 15, 2021, Ivanhoe sold the shares in CTN Corporation for $6.25 per share. Prepare the journal entries required to record the sale, assuming the company uses the fair value through other comprehensive income without recycling method. (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 Jan. 15, 2021 (To adjust to current fair value) (To record the sale of shares) (Reclassification…arrow_forward
- Intermediate Accounting: Reporting And AnalysisAccountingISBN:9781337788281Author:James M. Wahlen, Jefferson P. Jones, Donald PagachPublisher:Cengage Learning