Question

. Judd, Inc., owns 5% of Cosby Corporation. During the calendar year 2018, Cosby had net earnings of $300,000 and paid dividends of $30,000. Judd paid $2,000,000 for Crosby in 2018. At the end of the year the fair value of Crosby was $1,750,000. Please provide the journal entries for Judd related to these events.

part 2

Judd, Inc., owns 35% of Cosby Corporation (Judd has significant influence). During the calendar year 2018, Cosby had net earnings of $300,000 and paid dividends of $30,000. Please provide the journal entries related to these events.

Answer 1

1. When the company does not have significant influence over other entity i.e. owns less than 20% of its common stock and the company intends to sell the investments within one year i.e. they are held for trading, they are generally classified through income. At each reporting period, the value of investment is marked to the market and any difference is classified as profit/loss on financial asset.

Journal Entries to be recorded in the books of Judd Inc.

Date	Account and explanations	Debit	Credit
		$	$
2018	Investments in shares of Crosby Corporation (FVTPL)	2,000,000
	Cash		2,000,000
(To record acquisition of shares)
2018	Cash	1,500*
	Dividend Income on Investments in shares		1,500
(To record Receipt of Dividend)
* $30,000*5% = $1,500
2018	Unrealized loss on investments (Income Statement)	250,000
	Investments in shares of Crosby Corporation (FVTPL)		250,000
(To record unrealized loss on fair valuation)
* Loss on fair valuation= $2,000,000 - 1,750,000= $250,000

2. The equity method is used when the investor company holds more than 20 percent but less than 50 percent of another company's stock. In this case, the investor has significant power, influence and control over the investee's operations.Under the equity method, the initial investment is recorded at cost. Afterward, that value gets adjusted periodically to reflect fluctuations in the investment's income and losses. When an investee reports a certain income, the value of the investor's investment increases by an amount proportional to the percentage of ownership.If the investee pays a dividend, the investor receiving the dividend will record the cash amount but will also record a decrease in the value of the investment on its balance sheet. Under the equity method, dividends are not treated as income, but, instead, they are considered a return of investment.

As Jaddu Inc has significant influence over Crosby Corporation, it will use Equity method.

Journal Entries to be recorded in the books of Judd Inc.

Date	Account and explanations	Debit	Credit
2018	Investment in Sharp Inc. Company Shares	2,000,000
	Cash		2,000,000
(To record acquisition of common shares)
2018	Cash	4,500*
	Investment in Sharp Inc. Company Shares		4,500
(To record Receipt of Dividend)
* $30,000 * 15% = $4,500
2018	Investment in Sharp Inc. Company Shares	105,000*
	Revenue from investment in company shares		105,000
(To Record Profit on Equity Investments)
* Profit = $300,000*35%=$105,000

There will be no entry of fair value adjustments as per equity method

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