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Jeffery Company purchased 10% of the outstanding common stock (75,000 shares) of Another Company on January...

Jeffery Company purchased 10% of the outstanding common stock (75,000 shares) of Another Company on January 1, 2020 for $750,000. The investment was not sufficient to give Jeffery Company the ability to significantly influence the operations of Another Company. On January 1, 2020, the fair value of the percentage of Another Company’s net assets purchased by Jeffery Company exceeded book value by $20,000. The difference was attributable to plant assets with remaining useful life of five years. During 2020, Another Company reported net income of $150,000 and paid dividends of $40,000. The fair value of Another Company’s common stock on December 31, 2020 was $15 per share.

The entry to record the purchase of the stock on January 1, 2020 would include?

The entry to record the dividends Jeffery Company received from Another Company would include? check figure; A credit to investment revenue for $4,000

As a result of the investment, Jeffery Company's income before income tax for the year ended December 31, 2020 would increase by? check figure;$379,000

The entry on December 31, 2020 to recognize changes in fair value would include? check figure: A credit to unrealized holding gain for $375,000

Jeffery Company would report an investment in Another Company on the balance sheet as of December 31, 2020 of?

Please explain in detail the answers I would appreciate the help thanks.

Solutions

Expert Solution

Since the Holding is than 20% Cost Method also known as Fair Value Mthod will be used for accounting

  • Entry on 1Jan,2020 shall be basis the cost incurred to procure 10% stake ie $ 750000

JOURNAL:

Investment In Equity Shares....DR 750000

Cash .........................................CR 750000

  • For recording Dividend of $ 4000 (10% of $ 40000)

JOURNAL

Entry-1

Cash.....................DR 4000

Dividend Income...CR 4000

Entry-2

Dividend Income...DR 4000

Profit and Loss A/C...CR 4000

  • Purchase Price per share was $ 10 (750000/75000).At year end rate per share moves up to $ 15,THerefore there is a Unrealized Gain of $ 5 per share totalling to $ 375000 (5*75000).To this Dividend Income of $ 4000 when added will increase the Earnings before Tax by $ 379000
  • Purchase Price per share was $ 10 (750000/75000).At year end rate per share moves up to $ 15,THerefore there is a Unrealized Gain of $ 5 per share totalling to $ 375000 (5*75000).This will be taken to Profit and Loss account.
  • Jeffery will report Investment in Another Company in Balance Sheet on 31st Decemeber 2020 at Fair Market Value ie. (15*75000) i.e. $ 1125000

ekkarill92 answered 2 months ago
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