close solutoin list

Stock investment transactions, equity method and available-for-sale securities Glacier Products Inc. is a wholesaler of rock climbing Gear. The Company began operations on January 1. Year 1. The following transactions relate to securities acquired by Glacier Products Inc., which has a fiscal year ending on December 31: Year 1 Jan. 18. Purchased 9,000 shares of Malmo Inc. as an available-for-sale: investment at $40 per share, including the brokerage commission. July 22. A cash dividend of $3 per share was received on the Malmo stock. Oct. 5. Sold 500 shares of Malmo Inc. stock at $58 per share less a brokerage commission of $100. Dec. 18 Received a regular cash dividend of $30 per share on Malmo Inc. stock. 31. Malmo Inc. is classified as an available-for-sale investment and is adjusted to a fair value of $36 per share. Use the valuation allowance for available-for-sale investments account in making the adjustment. Year 2 Jan. 25. Purchased an influential interest in Helsi Co. for $800.000 by purchasing 75.000 shares directly from the estate of the founder of Helsi. There are 250,000 shares of Helsi Co. stock outstanding. July 16. Received a cash dividend of $3 per share on Malmo Inc. stock. Dec. 16. Received a cash dividend of $3 per share plus an extra dividend of $0.20 per share on Malmo Inc. stock. 31. Received $38,000 of cash dividends on Helsi Co. stock, Helsi Co. reported net income of $170,000 in Year 2. Glacier Products Inc. uses the equity method of accounting for its investment in Helsi Co. 31. Malmo Inc. is classified as an available-for-Sale investment and is adjusted to a fair value of $44 per share. Use the valuation allowance for available-for-sale investments account in making the adjustment for the increase in fair value from $36 to $44 per share. Instructions 1. Journalize the entries to record the preceding transactions. 2. Prepare the investment-related asset and .stockholders’ equity balance sheet presenta­tion for Glacier Products Inc. on December 31, Year 2, assuming that the Retained Earnings balance on December 31, Year 2, is $700,000.

BuyFind

Accounting

27th Edition
WARREN + 5 others
Publisher: Cengage Learning,
ISBN: 9781337272094
BuyFind

Accounting

27th Edition
WARREN + 5 others
Publisher: Cengage Learning,
ISBN: 9781337272094

Solutions

Chapter
Section
Chapter 15, Problem 15.3BPR
Textbook Problem

Stock investment transactions, equity method and available-for-sale securities

Glacier Products Inc. is a wholesaler of rock climbing Gear. The Company began operations on January 1. Year 1. The following transactions relate to securities acquired by Glacier Products Inc., which has a fiscal year ending on December 31:

Year 1  
Jan. 18. Purchased 9,000 shares of Malmo Inc. as an available-for-sale: investment at $40 per share, including the brokerage commission.
July 22. A cash dividend of $3 per share was received on the Malmo stock. Oct. 5. Sold 500 shares of Malmo Inc. stock at $58 per share less a brokerage commission of $100.
Dec. 18 Received a regular cash dividend of $30 per share on Malmo Inc. stock.
31. Malmo Inc. is classified as an available-for-sale investment and is adjusted to a fair value of $36 per share. Use the valuation allowance for available-for-sale investments account in making the adjustment.
Year 2  
Jan. 25. Purchased an influential interest in Helsi Co. for $800.000 by purchasing 75.000 shares directly from the estate of the founder of Helsi. There are 250,000 shares of Helsi Co. stock outstanding.
July 16. Received a cash dividend of $3 per share on Malmo Inc. stock.
Dec. 16. Received a cash dividend of $3 per share plus an extra dividend of $0.20 per share on Malmo Inc. stock.
31. Received $38,000 of cash dividends on Helsi Co. stock, Helsi Co. reported net income of $170,000 in Year 2. Glacier Products Inc. uses the equity method of accounting for its investment in Helsi Co.
31. Malmo Inc. is classified as an available-for-Sale investment and is adjusted to a fair value of $44 per share. Use the valuation allowance for available-for-sale investments account in making the adjustment for the increase in fair value from $36 to $44 per share.

Instructions

1. Journalize the entries to record the preceding transactions.

2. Prepare the investment-related asset and .stockholders’ equity balance sheet presenta­tion for Glacier Products Inc. on December 31, Year 2, assuming that the Retained Earnings balance on December 31, Year 2, is $700,000.

Expert Solution

(1)

To determine

Equity investments: Equity investments are stock instruments which claim ownership in the investee company and pay a dividend revenue to the investor company.

Equity method: Equity method is the method used for accounting equity investments which claim a significant influence of above 20% but less than 50% in the outstanding stock of the investee company.

Available-for-sale securities: These are short-term or long-term investments in debt and equity securities with an intention of holding the investment for some strategic purposes like meeting liquidity needs, or manage interest risk.

Journal entry: Journal entry is a set of economic events which can be measured in monetary terms. These are recorded chronologically and systematically.

Debit and credit rules:

  • Debit an increase in asset account, increase in expense account, decrease in liability account, and decrease in stockholders’ equity accounts.
  • Credit decrease in asset account, increase in revenue account, increase in liability account, and increase in stockholders’ equity accounts.

To journalize: The stock investment transactions for Company G

Explanation of Solution

Prepare journal entry for the purchase of 9,000 shares of Company M, at $40 per share.

Date Account Titles and Explanations Post. Ref. Debit ($) Credit ($)
Year 1        
January 18 Investments–Company M Stock   360,000  
             Cash     360,000
    (To record purchase of shares for cash)      

Table (1)

Explanation:

  • Investments–Company M Stock is an asset account. Since stock investments are purchased, asset value increased, and an increase in asset is debited.
  • Cash is an asset account. Since cash is paid, asset account decreased, and a decrease in asset is credited.

Working Notes:

Compute amount of cash paid to purchase Company M’s stock.

Cash paid = (Number of shares purchased× Price per share)(9,000 shares ×$40)= $360,000

Prepare journal entry for the dividend received from Company M for 9,000 shares.

Date Account Titles and Explanations Post. Ref. Debit ($) Credit ($)
Year 1        
July 22 Cash   27,000  
             Dividend Revenue     27,000
    (To record receipt of dividend revenue)      

Table (2)

Explanation:

  • Cash is an asset account. Since cash is received, asset account increased, and an increase in asset is debited.
  • Dividend Revenue is a revenue account. Since revenues increase equity, equity value is increased, and an increase in equity is credited.

Working Notes:

Compute amount of dividend received on Company M’s stock.

Dividend received = Number of shares ×Dividend per share= 9,000 shares ×$3= $27,000

Prepare journal entry for sale of 500 shares of Company M, at $58, with a brokerage of $100.

Date Account Titles and Explanations Post. Ref. Debit ($) Credit ($)
Year 1        
October 5 Cash   28,900  
           Gain on Sale of Investments     8,900
           Investments–Company M Stock     20,000
    (To record sale of shares)      

Table (3)

Explanation:

  • Cash is an asset account. Since cash is received, asset account increased, and an increase in asset is debited.
  • Gain on Sale of Investments is an expense account. Since expenses and losses decrease equity, equity value is decreased, and a decrease in equity is debited.
  • Investments–Company M Stock is an asset account. Since stock investments are sold, asset value decreased, and a decrease in asset is credited.

Working Notes:

Calculate the realized gain (loss) on sale of stock.

Step 1: Compute cash received from sale proceeds.

Cash received = {(Number of shares sold× Sale price per share)Brokerage commission}(500 shares ×$58)$100= $28,900

Step 2: Compute cost of stock investment sold.

Cost of stock investment sold} = Number of shares sold × Cost price per share= 500 shares ×$40= $20,000

Step 3: Compute realized gain (loss) on sale of stock.

Realized gain (loss)on investments} = {Cash received –Cost of stock investment }= $28,900–$20,000= $8,900

Note: Refer to Steps 1 and 2 for value and computation of cash received and cost of stock investment sold.

Prepare journal entry for the dividend received from Company M for 8,500 shares.

Date Account Titles and Explanations Post. Ref. Debit ($) Credit ($)
Year 1        
December 18 Cash   25,500  
             Dividend Revenue     25,500
    (To record receipt of dividend revenue)      

Table (4)

Explanation:

  • Cash is an asset account. Since cash is received, asset account increased, and an increase in asset is debited.
  • Dividend Revenue is a revenue account. Since revenues increase equity, equity value is increased, and an increase in equity is credited.

Working Notes:

Compute amount of dividend received on Company M’s stock.

Dividend received = Number of shares ×Dividend per share(9,000–500) shares ×$3= $25,500

Prepare adjusting entry for valuation of available-for-sale securities transaction.

Table (5)

Explanation:

  • Unrealized Gain (Loss) on Available-for-Sale Investments is an adjustment account used to report gain or loss on adjusting cost of investment at fair market value. Since loss has occurred and losses reduce stockholders’ equity value, and a decrease in stockholders’ equity value is debited.
  • Valuation Allowance for Available-for-Sale Investments is a contra-asset account. The account is credited because the market price was decreased (loss) to $306,000 from the cost of $340,000.

Working Notes:

Compute the unrealized gain (loss) as on December 31, Year 1.

Details Amount ($)
Available-for-sale investments at fair value, December 31, ((9,000–500) shares×$36) $306,000
Less: Available-for-sale investments at cost, December 31, ((9,000–500) shares×$40) (340,000)
Unrealized gain (loss) on available-for-sale investments $(34,000)

Table (6)

Prepare journal entry for the purchase of 75,000 shares out of the outstanding stock of 250,000 shares of Company H at $800,000

Expert Solution

(2)

To determine

To indicate: The presentation of available-for-sale investments, equity method investments, and stockholders’ equity on the balance sheet as on December 31, Year 2

Want to see this answer and more?

Bartleby provides explanations to thousands of textbook problems written by our experts, many with advanced degrees!

See solution

Chapter 15 Solutions

Accounting
Show all chapter solutions
Ch. 15 - Bond investment transactions Journalize the...Ch. 15 - Bond investment transactions Journalize the...Ch. 15 - Stock investment transactions On January 23,...Ch. 15 - Stock investment transactions On September 12,...Ch. 15 - Equity method On January 2, Cohan Company acquired...Ch. 15 - Equity method On January 2, Yorkshire Company...Ch. 15 - Valuing trading securities at fair value On...Ch. 15 - Valuing trading securities at fair value On...Ch. 15 - valuing available-for-sale securities at fair...Ch. 15 - Valuing available-for-sale securities at fair...Ch. 15 - Dividend yield On June 30, Setzer Corporation had...Ch. 15 - Dividend yield On October 23, Wilkerson Company...Ch. 15 - Entries for investment in bonds, interest and sale...Ch. 15 - Entries for investments in bonds, interest, and...Ch. 15 - Entries for investment in bonds, interest and sale...Ch. 15 - Entries for investment in bonds, interest and sale...Ch. 15 - Interest on bond investments On February 1, Hansen...Ch. 15 - Entries for investment in stock, receipt of...Ch. 15 - Entries for investment in stock, receipt of...Ch. 15 - Entries for stock investments, dividends, and sale...Ch. 15 - Entries for stock investments, dividends, and sale...Ch. 15 - Equity method for stock investment At a total cost...Ch. 15 - Equity method for stock investment On January 4,...Ch. 15 - Equity method for stock investment with loss On...Ch. 15 - Equity method for stock investment Hawkeye...Ch. 15 - Missing statement items, trading investments JED...Ch. 15 - Fair value journal entries, trading investments...Ch. 15 - Fair value journal entries, trading investments...Ch. 15 - Fair value journal entries, trading investments...Ch. 15 - Balance sheet presentation, trading investments...Ch. 15 - Missing statement items, available-for-sale...Ch. 15 - Fair value journal entries, availableforsale...Ch. 15 - Fair value journal entries, available for sale...Ch. 15 - Fair value journal entries, availableforsale...Ch. 15 - Balance sheet presentation of available-for-sale...Ch. 15 - Balance sheet presentation of available-for-ale...Ch. 15 - Dividend yield At the market close on May 12 of a...Ch. 15 - Dividend yield The market price for Microsoft...Ch. 15 - Dividend yield eBay Inc. developed a web-based...Ch. 15 - Comprehensive income On May 12, Year 1, Chewco Co....Ch. 15 - Comprehensive income On December 31, Year 1, Valur...Ch. 15 - Debt investment transactions, available-for-sale...Ch. 15 - Stock investment transactions, trading securities...Ch. 15 - Stock investment transactions, equity method and...Ch. 15 - Investment reporting O'Brien Industries Inc. is a...Ch. 15 - Debt investment transactions, available for-sale...Ch. 15 - Stock investment transactions, trading securities...Ch. 15 - Stock investment transactions, equity method and...Ch. 15 - Investment reporting Teasdale Inc. manufactures...Ch. 15 - Selected transactions completed by Equinox...Ch. 15 - Ethics in Action Financial assets include stock...Ch. 15 - Reporting investments Group Project In groups of...Ch. 15 - Warren Buffett and "look-through" earnings...Ch. 15 - Benefits of fair value On July 16, 20Y1, Wyatt...Ch. 15 - International fair value accounting International...

Additional Business Textbook Solutions

Find more solutions based on key concepts
Show solutions
What is inflation and what causes it?

Principles of Microeconomics (MindTap Course List)

Explain how absolute advantage and comparative advantage differ.

Essentials of Economics (MindTap Course List)

What is data mining?

Accounting Information Systems

What is the purpose of the FUTA tax, and who must pay it?

College Accounting, Chapters 1-27 (New in Accounting from Heintz and Parry)

EXCESS CAPACITY Edney Manufacturing Company has 2 billion in sales and 0.6 billion in fixed assets. Currently, ...

Fundamentals of Financial Management, Concise Edition (with Thomson ONE - Business School Edition, 1 term (6 months) Printed Access Card) (MindTap Course List)