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Cornerstones of Financial Accounti...

4th Edition
Jay Rich + 1 other
ISBN: 9781337690881

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Cornerstones of Financial Accounti...

4th Edition
Jay Rich + 1 other
ISBN: 9781337690881
Textbook Problem
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Fair Value Method

On January 1, 2019, Miller Inc. acquired 1.500 shares of the outstanding common stock of Graceland Industries for SI 6 per share, or S24.000. On that date, Graceland had 10.000 shares of common stock outstanding. On October 1, 2019, Graceland declared and paid a cash dividend of $2 per share. On November 13, 2019, Miller sold 300 shares of Graceland for $5,000. Graceland reported 2019 net income of S36.000. Graceland’s stock sold for $15 per share at December 31, 2019. This is Miller’s only investment, and Miller plans on remaining invested in Graceland for a number of years.

Required:

1. Prepare Miller’s journal entries to record the transactions related to its investment in Graceland.

2. Give the title and amount of each item (except Cash) related to this investment on the December 31,2019 balance sheet. Name the balance sheet section in which each item appears.

To determine

Concept introduction:

Fair Value Method: Fair market value method is applied when there is less than 20% share in company. In fair market value method we value the investment on its market value and difference is recorded in the income statement as a profit or loss.

Requirement 1:

To calculate:

Journal entry to record the investment.

Explanation

a. Investment A/c 24000

Cash 24000

(Being Investment purchased in cash.)

b. Cash A/c 3000

Dividend Income A/c 3000

(Being Dividend received in cash.)

c...

To determine

Concept introduction:

Fair Value Method: Fair market value method is applied when there is less than 20% share in company. In fair market value method we value the investment on its market value and difference is recorded in the income statement as a profit or loss.

Requirement 2:

To indicate:

The amount of each item related to shown in the balance sheet.

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