Jaycie Phelps Inc. acquired 20% of the
outstanding common stock of Theresa Kulikowski Inc. on December 31, 2008. The
purchase price was $1,200,000 for 50,000 shares. Kulikowski Inc. declared and
paid an $0.85 per share cash dividend on June 30 and on December 31, 2009.
Kulikowski reported net income of $730,000 for 2009. The fair value of
Kulikowski’s stock was $27 per share at December 31, 2009.
Instructions
(a) Prepare the journal entries for Jaycie
Phelps Inc. for 2008 and 2009, assuming that Phelps cannot exercise significant
influence over Kulikowski. The securities should be classified as
available-for-sale.
(b) Prepare the journal entries for Jaycie
Phelps Inc. for 2008 and 2009, assuming that Phelps can exercise significant influence
over Kulikowski.
(c) At what amount is the investment in
securities reported on the balance sheet under each of these methods at December
31, 2009? What is the total net income reported in 2009 under each of these
methods?
(a) December
31, 2008
Available-for-Sale
Securities................................................ 1,200,000
Cash............................................................................... 1,200,000
June
30, 2009
Cash 42,500
Dividend
Revenue....................................................... 42,500
December
31, 2009
Cash 42,500
Dividend
Revenue....................................................... 42,500
Securities
Fair Value Adjustment
(Available-for-Sale)............................................................
150,000
Unrealized
Holding Gain or Loss—
Equity.......................................................................... 150,000
$27
X 50,000 = $1,350,000
$1,350,000
– $1,200,000 = $150,000
(b) December
31, 2008
Investment
in Kulikowski Stock.................................................... 1,200,000
Cash 1,200,000
June
30, 2009
Cash 42,500
Investment
in Kulikowski Stock.......................................... 42,500
December
31, 2009
Cash 42,500
Investment
in Kulikowski Stock.......................................... 42,500
Investment
in Kulikowski Stock.................................................... 146,000
Revenue
from Investment................................................... 146,000
(20% X $730,000)
|
(c)
|
|
Fair Value Method
|
Equity Method
|
|
|
Investment amount (balance sheet)........................
|
$1,350,000
|
*$1,261,000*
|
|
|
Dividend revenue (income statement)....................
|
85,000
|
0
|
|
|
Revenue from investment
(income statement)................................................. |
|
146,000
|
*$1,200,000
+ $146,000 – $42,500 – $42,500
