In: Accounting
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 7,300 shares of Malmo Inc. as an available-for-sale investment at $36 per share, including the brokerage commission. |
July 22. | A cash dividend of $0.45 per share was received on the Malmo stock. |
Oct. 5. | Sold 2,200 shares of Malmo Inc. stock at $39 per share less a brokerage commission of $60. |
Dec. 18. | Received a regular cash dividend of $0.45 per share on Malmo Inc. stock. |
Dec. 31 | Malmo Inc. is classified as an available-for-sale investment
and is adjusted to a fair value of $33 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 $710,000 by
purchasing 70,000 shares directly from the estate of the founder of Helsi. There are 200,000 shares of Helsi Co. stock outstanding. |
July 16. | Received a cash dividend of $0.55 per share on Malmo Inc. stock. |
Dec. 16. | Received a cash dividend of $0.55 per share plus an extra dividend of $0.15 per share on Malmo Inc. stock. |
Dec. 31 | Received $21,000 of cash dividends on Helsi Co. stock. Helsi
Co. reported net income of $86,000 in Year 2. Glacier Products Inc. uses the equity method of accounting for its investment in Helsi Co. |
Dec. 31 | Malmo Inc. is classified as an available-for-sale investment and is adjusted to a fair value of $39 per share. Use the valuation allowance for available-for-sale investments account in making the adjustment for the increase in fair value from $33 to $39 per share. |
Required:
1. Journalize the entries to record the preceding transactions. For a compound transaction, if an amount box does not require an entry, leave it blank. In your computations, round per share amounts to two decimal places.
Date | Description | Debit | Credit |
---|---|---|---|
Year 1 | |||
Jan. 18. | Investments-Malmo Inc. | ||
Cash | |||
July 22. | Cash | ||
Dividend Revenue | |||
Oct. 5. | Cash | ||
Gain on Sale of Investments | |||
Investments-Malmo Inc. | |||
Dec. 18. | Cash | ||
Dividend Revenue | |||
Dec. 31 | Unrealized Gain (Loss) on Available-for-Sale Investments | ||
Valuation Allowance for Available-for-Sale Investments | |||
Year 2 | |||
Jan. 25. | Investment in Helsi Co. Stock | ||
Cash | |||
July 16. | Cash | ||
Dividend Revenue | |||
Dec. 16. | Cash | ||
Dividend Revenue | |||
Dec. 31-Dividends | Cash | ||
Investment in Helsi Co. Stock | |||
Dec. 31-Income | Investment in Helsi Co. Stock | ||
Income of Helsi Co. | |||
Dec. 31-Valuation | Valuation Allowance for Available-for-Sale Investments | ||
Unrealized Gain (Loss) on Available-for-Sale Investments |
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 $518,000.
Glacier Products, Inc. Balance Sheet (selected items) December 31, Year 2 |
||
---|---|---|
Current Assets: | ||
Available-for-Sale Investments (at Cost) | ||
Plus Valuation Allowance for Available-for-Sale Investments | ||
Available-for-Sale Investments (at Fair Value) | ||
Investments: | ||
Investment in Helsi Co. Stock | ||
Stockholders' Equity: | ||
Retained Earnings | ||
Unrealized Gain (Loss) on Available-for-Sale Investments |
Answer:
1.
Journal Entries:
No. | Date | General Journal | Debit | Credit |
Year 1 | ||||
1 | Jan. 18. | Investments - Malmo Inc | 262,800 | |
Cash | 262,800 | |||
2 | July 22. | Cash | 3,285 | |
Dividend Revenue | 3,285 | |||
3 | Oct. 5. | Cash | 85,740 | |
Gain on sale of investments | 6,540 | |||
Investments - Malmo Inc | 79,200 | |||
4 | Dec. 18. | Cash | 2,295 | |
Dividend revenue | 2,295 | |||
5 | Dec. 31 | Unrealized gain (Loss) on Available for sale Investments | 15,300 | |
Valuation allowance for Available for sale investments | 15,300 | |||
Year 2 | ||||
6 | Jan. 25. | Investment in Helsi Co. Stock | 710,000 | |
Cash | 710,000 | |||
7 | July 16. | Cash | 2,805 | |
Dividend revenue | 2,805 | |||
8 | Dec. 16. | Cash | 3,570 | |
Dividend revenue | 3,570 | |||
9 | Dec. 31 | Cash | 21,000 | |
Investment in Helsi Co. Stock | 21,000 | |||
10 | Dec. 31 | Investment in Helsi Co. Stock | 30,100 | |
Income of Helsi Co. | 30,100 | |||
11 | Dec. 31 | Valuation allowance for Available for sale investments | 30,600 | |
Unrealized gain (Loss) on Available for sale Investments | 30,600 |
2.
Balance Sheet :
Glacier Products, Inc. | ||
Balance Sheet (selected items) | ||
December 31, Year 2 | ||
Current Assets: | ||
Available-for-sale investments | 183,600 | |
Plus: Valuation Allowance for Available-for-Sale Investments | 15,300 | |
Available-for-Sale Investments (at Fair Value) | 198,900 | |
Investments: | ||
Investment in Helsi Co. Stock | 719,100 | |
Stockholders' Equity: | ||
Retained Earnings | 518,000 | |
Unrealized Gain (Loss) on Available-for-Sale Investments | 15,300 |
Calculation:
1.
The calculation for the transactions provided:
Entry #1:
Investments - Malmo Inc = 7,300 x 36 = 262,800
Entry #2:
Dividend Revenue = 7,300 x 0.45 = 3,285
Entry #3:
Cash received = 2,200 x 39 - 60 = 85,740
Investments - Malmo Inc = 2,200 x 36 = 79,200
Gain on sale of investments = Cash received - Investments = 85,740 - 79,200 = 6,540
Entry #4:
Dividend Revenue = 7,300 - 2,200 x 0.45 = 2,295
Entry #5:
Unrealized gain (Loss) on Available for sale Investment = (7,300 - 2,200) x(36-33) = 15,300
Entry #7:
Dividend Revenue = 7,300 - 2,200 x 0.55 = 2,805
Entry #8:
Dividend Revenue = 7,300 - 2,200 x (0.55 - 0.15) = 3,570
Entry #10:
Investment in Helsi Co. Stock = 86,000 *(70,000 /200,000) = 30,100
Entry #11:
Unrealized gain (Loss) on Available for sale Investment = (7,300 - 2,200)*(39-33) = 30,600
2.
To prepare the investment-related asset and stockholders’ equity balance sheet presentation for Glacier Products Inc. The current assets include Available-for-sale investments, and then add year- 2 Valuation Allowance for Available-for-Sale Investments, to get the Available-for-Sale Investments (at Fair Value).
The Available-for-Sale Investments (at cost) = (7,300 - 2,200) x 36 = 183,600
Available-for-Sale Investments (at Fair Value) = (7,300 - 2,200) x 39 = 198,900
Investment in Helsi Co. Stock = 710,000 +310,000 - 21,000 = 719,100
Then, the stockholders equity includes, the Retained Earnings which is given in the question and the Unrealized Gain (Loss) on Available-for-Sale Investments of 15,300.