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Intermediate Accounting: Reporting...

3rd Edition
James M. Wahlen + 2 others
ISBN: 9781337788281

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Intermediate Accounting: Reporting...

3rd Edition
James M. Wahlen + 2 others
ISBN: 9781337788281
Textbook Problem
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Comparison of Fair Value and Equity Methods On January 1, 2019, Snow (Corporation purchased 20% of the 200,000 outstanding shares of common stock of Garvey Company for $4.00 per share as a long-term investment. The purchase price of the shares was equal to their book value. The following information is available about Garvey for 2019 and 2020:

Chapter 13, Problem 17P, Comparison of Fair Value and Equity Methods On January 1, 2019, Snow (Corporation purchased 20% of

Required:

  1. 1. Prepare journal entries to record this information, assuming:
    1. a. Snow accounts for the investment as an equity security for which it does not have significant influence.
    2. b. Snow uses the equity method.
  2. 2. Assume 10,000 of the Garvey shares are sold on January 4, 2021, by Snow for $4.30 per share. Prepare the journal entry for this sale, assuming:
    1. a. Snow accounts for the investment as an equity investment for which it does not have significant influence.
  3. b. Snow uses the equity method.

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

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.

Number of shares purchased=[Company G's outstanding shares×Percentageof Company G's shares acquired by Corporation S]=200,000shares×20%=40,000shares

Corporation S purchased 20% shares of Company G for (40,000shares×$4per share) $160,000.

Step 2: Record the entry.

DateAccount Title and Explanation Debit Credit 
January 1, 2019Investment 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 ($30,000 dividend declared by Company G×20%shares held) $6,000 dividend.

DateAccount Title and Explanation Debit Credit 
December 31, 2019Cash$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.

Unrealized holdingloss or gain} =[Number of shares purchased×(Market value per share on December 31, 2018Purchase price per share)]=[40,000shares×($3.80$4.00)]=$8,000(loss)

Step 2: Record the adjusting entry

1. b.

To determine

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

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.

2. b.

To determine

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

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