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On January 2, 2020, Pull Corp. paid $516,000 for 24% (96,000 shares) of the outstanding common...

On January 2, 2020, Pull Corp. paid $516,000 for 24% (96,000 shares) of the outstanding common stock of Olivia Co. Pull used the equity method to account for the investment. At the end of 2020, the balance in the investment account was $820,000. On January 2, 2021, Pull sold 20,000 shares of Olivia stock for $12 per share. For 2021, Oliver reported income of $188,000 and paid dividends of $30,000. Required:

(A.) Prepare the journal entry to record the sale of the 20,000 shares.

(B.) After the sale has been recorded, what is the balance in the investment account?

(C.) What percentage of Olivia Co. stock does Pull own after selling the 20,000 shares?

(D.) Because of the sale of stock, Pull can no longer exercise significant influence over the operations of Olivia. What effect will this have on Pull's accounting for the investment?

(E.) Prepare Pull's journal entries related to the investment for the rest of 2021.

Solutions

Expert Solution

Balance of Investment at the end of 2020 $820,000
Sale of Investment on Jan 2,21 20000 stock for $12 per share
Value of Investment for 20000 stock at the end of 2020 $                                                         170,833
Sale Price $                                                         240,000
Gain on Sale of Investment $                                                           69,167
a) Journal Entry to record Sale
Date Account Debit Credit
2021, Jan 2 Cash        $          240,000
    Investment in Associate $      170,833
     Gain on sale of Investment $        69,167
( Sale of 20000 shares of Olivia Co.)
b)After sale of stock, balance in Investment account
Value of Investment at the end of 2020 $                                                         820,000
Value of Investment sold on Jan 2,2021 $                                                         170,833
Balance of Investment $                                                         649,167
c) Percantage of Stock of Olivia Co. held after sale of 20000 stock
No. of Stock held before sale 96000
Share in Olivia Co. 24%
Total Stock of Olivia Co. $ 400,000 (96000/24%)
No. of Stock held after Sale 76000
% held in Olivia Co. stock after Sale 19% (76000/400000)*100
d) Change in Accounting Method for sale of Investment
The Equity method is used to value a company's investment in another company when it holds significant influence over the company which is 20 - 50% ownership.
Under the equity method, the investment is initially recorded at historical cost and adjustments are made to value of Investment based on share in net income, loss, and dividend payout of Associate Company.
In this Case since Pull Corp. held 24% ownership in the stock of Olivi Co., Equity Method of accounting for Investment was used.
Since the Investment in Olivia Co. after sale of 20000 stock reduced to 19%, Pull Corp. loses its significant influence over Olivia Co.Hence Accounting method change from Equity to Fair Value Accounting.
Under Fair Value Accounting Investment of less than 20% is carried at historic bookvalue or fair market value(if available for sale or trade) in the Investor's balance sheet.
e)Journal Entry for 2021
Date Account Debit Credit
2021 Dividend Receivable $               5,700
               Dividend Income $           5,700
(Share of Dividend receivable for Investment in Olive Co.)

ekkarill92 answered 1 year ago
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