Chapter 15, Problem 4APSA

Requirement 1

To determine

To prepare:

Journal entries to record the transactions and events given for Selk

Answer to Problem 4APSA

Solution:

Date	Accounts Titles and Descriptions	Debit	Credit
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 −

  $\begin{array}{l}Selk’sdividends=DividendspaidXSelk’sshares\text{ in Kildarie}\\ Selk’sdividends=\$3.20X\text{ 60000 shares}\\ Selk’sdividends=\$192,000\end{array}$

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 −

  $\begin{array}{l}Selk’s\text{ net income}=NetIncomeX\text{ Selk}’ssharesin\text{ Kildarie}\\ Selk’s\text{ net income}=\$1,164,000X\text{ 20 \%}\\ Selk’s\text{ net income }=\$232,800\end{array}$

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 −

  $\begin{array}{l}Selk’sdividends=DividendspaidXSelk’sshares\text{ in Kildarie}\\ Selk’sdividends=\$2.60X\text{ 60000 shares}\\ Selk’sdividends=\$156,000\end{array}$

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 −

  $\begin{array}{l}Selk’s\text{ net income}=NetIncomeX\text{ Selk}’ssharesin\text{ Kildarie}\\ Selk’s\text{ net income}=\$1,476,000X\text{ 20 \%}\\ Selk’s\text{ net income }=\$295,200\end{array}$

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

  $\begin{array}{l}\begin{array}{l}Carryingvalueofinvestment=Purchasepriceofshares+\left(\begin{array}{l}Netincomeforyear2015\\ +Netincomeforyear2016\end{array}\right)\\ –\left(\begin{array}{l}Dividendfor2015\\ +Dividendfor2016\end{array}\right)\end{array}\hfill \\ Carryingvalueofinvestment=\$1,560,000+\left(\$232,800+\$295,200\right)-\left(\$192,000+\$156,000\right)\hfill \\ Carryingvalueofinvestment=\$1,740,000\hfill \end{array}$

Now, gain will be calculated as −

  $\begin{array}{l}Gainonsale=Salepriceofinvestment–Carryingvalueofinvestment\hfill \\ Gainonsale=\$1,894,000-\$1,740,000\hfill \\ Gainonsale=\$154,000\hfill \end{array}$

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

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

  $\begin{array}{l}Carrying\left(Book\right)valuepershare=\frac{Carryingvalueofinvestment}{Numberofsharespurchased}\hfill \\ Carrying\left(Book\right)valuepershare=\frac{\$1,740,000}{60,000shares}\hfill \\ Carrying\left(Book\right)valuepershare=\$29pershare\hfill \end{array}$

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

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

  $\begin{array}{l}Netincrease=\left(\begin{array}{l}EarningsfromKildarie–2015\\ +EarningsfromKildarie–2016\end{array}\right)+GainonsaleofInvestment\hfill \\ Netincrease=\$232,800+\$295,200+\$154,000\hfill \\ Netincrease=\$682,000\hfill \end{array}$

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

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 −

  $\begin{array}{l}\begin{array}{l}Dividendreceived=NumberofsharesXDividendpershare\hfill \\ Dividendreceived=60,000sharesX\$3.20pershare\hfill \end{array}\\ Dividendreceived=\$192,000\end{array}$

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 −

  $\begin{array}{l}Totalfairvalue=NumberofsharesXFairvaluepershare\hfill \\ Totalfairvalue=60,000sharesX\$30\hfill \\ Totalfairvalue=\$1,800,000\hfill \end{array}$

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

  $\begin{array}{l}Unrealizedgain=Totalfairvalue–Costpricepershare\hfill \\ Unrealizedgain=\$1,800,000-\$1,560,000\hfill \\ Unrealizedgain=\$240,000\hfill \end{array}$

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 −

  $\begin{array}{l}Dividendreceived=NumberofsharesXDividendpershare\hfill \\ Dividendreceived=60,000sharesX\$2.60pershare\hfill \\ Dividendreceived=\$156,000\hfill \end{array}$

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 −

  $\begin{array}{l}Totalfairvalue=NumberofsharesXFairvaluepershare\hfill \\ Totalfairvalue=60,000sharesX\$32\hfill \\ Totalfairvalue=\$1,920,000\hfill \end{array}$

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

  $\begin{array}{l}Unrealizedgain=Totalfairvalue–Costpricepershare\hfill \\ Unrealizedgain=\$1,920,000-\$1,800,000\hfill \\ Unrealizedgain=\$120,000\hfill \end{array}$

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 −

  $\begin{array}{l}Gainonsale=Salepriceofinvestment–Carryingvalueofinvestment\hfill \\ Gainonsale=\$1,894,000-\$1,560,000\hfill \\ Gainonsale=\$334,000\hfill \end{array}$

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

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

  $\begin{array}{l}Carrying\left(Book\right)valuepershare=\frac{Carryingvalueofinvestment}{Numberofsharespurchased}\hfill \\ Carrying\left(Book\right)valuepershare=\frac{\$1,560,000}{60,000shares}\hfill \\ Carrying\left(Book\right)valuepershare=\$26pershare\hfill \end{array}$

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

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

  $\begin{array}{l}Netincrease=\left(\begin{array}{l}EarningsfromKildarie–2015\\ +EarningsfromKildarie–2016\end{array}\right)+GainonsaleofInvestment\hfill \\ Netincrease=\$232,800+\$295,200+\$154,000\hfill \\ Netincrease=\$682,000\hfill \end{array}$

Conclusion

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