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Problem 15-4A Accounting for long-term investments in securities; with and without significant influence LO P3, P4

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Selk Steel Co., which began operations on January 4, 2017, had the following subsequent transactions and events in its long-term investments.

2017

Jan.	5	Selk purchased 50,000 shares (25% of total) of Kildaire's common stock for $1,200,000.
Oct.	23	Kildaire declared and paid a cash dividend of $3.50 per share.
Dec.	31	Kildaire's net income for 2017 is $1,234,000, and the fair value of its stock at December 31 is $30.70 per share.

2018

Oct.	15	Kildaire declared and paid a cash dividend of $3.00 per share.
Dec.	31	Kildaire's net income for 2018 is $1,546,000, and the fair value of its stock at December 31 is $32.70 per share.

2019

Jan.

2

Selk sold all of its investment in Kildaire for $1,800,000 cash.

Problem 15-4A Part 2

Part 2
Assume that although Selk owns 25% of Kildaire’s outstanding stock, circumstances indicate that it does not have a significant influence over the investee and that it is classified as an available-for-sale security investment.

Required:
1. Prepare journal entries to record the preceding transactions and events for Selk. Also prepare an entry dated January 2, 2019, to remove any balance related to the fair value adjustment. (If no entry is required for a transaction/event, select "No journal entry required" in the first account field.)

2. Compute the cost per share of Selk’s investment in Kildaire common stock as reflected in the investment account on January 1, 2019.

3. Compute the net increase or decrease in Selk’s equity from January 5, 2017, through January 2, 2019, resulting from its investment in Kildaire.

Answer 1

1) Journal Entries :-

Date	Particulars	Debit($)	Credit($)
2017
Jan 5	Loag Term Investment A/c Dr.	1200000
	To Cash A/c		1200000
Oct 23	Cash A/c Dr. (50000*$3.2)	160000
	To Dividend Revenue A/c		160000
Dec. 31	Market Adjustment A/c Dr.	335000
	To Unrealized Gain - Equity A/c		335000
	((50000*$30.70)-$1200000)
2018
Oct. 15	Cash A/c Dr. (50000*$3)	150000
	To Dividend Revenue A/c		150000
Dec. 31	Market Adjustment A/c Dr.	100000
	To Unrealized Gain - Equity A/c		100000
	((50000*$32.70)-$1200000-$335000)
2019
Jan. 2	Cash A/c Dr.	1800000
	To Long Term Investments A/c		1200000
	To Gain on Sale of Investements A/c		600000
Jan. 2	Unrealized Gain - Equity A/c Dr.	435000
	To Market Adjustment A/c		435000
	($335000+$100000)

2. Investment Cost Per Share on January 1, 2019:-

= $1200000 / 50000

= $24 per share

3. Change in Selk's equity due to stock investment :-

Particulars	Amount($)
Dividend Revenue in 2017	160000
Dividend Revenue in 2018	150000
Gain on sale of Investments	600000
Net Increase	910000