Question

In: Accounting

On March 31, 2012, Papa Doc Donuts, purchased 45,000 shares of Frenchie’s Beignets for $3.50 per...

On March 31, 2012, Papa Doc Donuts, purchased 45,000 shares of Frenchie’s Beignets for $3.50 per share. This purchase gives Papa Doc Donuts a 2.5% stake in Frenchie's Beignets. On January 1, 2013, Papa Doc Donuts purchased an additional 255,000 shares for $2.75 per share gaining an additional 17.5% stake in Frenchie's Beignets. The June 30, 2013 purchase gave Papa Doc Donuts the ability to apply significant influence over Frenchie's Beignets. The original 2.5% investment was categorized and accounted for as an available for sale security.

Frenchie's Beignets reports net income, cash dividends, and per share prices as follows. These amounts are assumed to have occurred evenly throughout these years. Cash dividends are declared and paid evenly throughout the same period.

Year:

2012 2013 2014

Net Income:

$975,000 $1,650,200 $1,575,000

Per share price (12/1 spot rate):

$105,200 $75,000 $120,000

Per Share Price (December 31st Spot Rate)
$2.75
$4.50
$5.75

On July 31, 2014, Papa Doc sells 60,000 shares of Frenchie's Beignets capital stock for $5.50 per share.

1.) Prepare the necessary journal entry Papa Doc Donuts would need to account for the March 31, 2012 acquisition of 2.5% of Frenchie's Beignets capital stock.

2.) Prepare Papa Doc Donuts December 31, 2012 journal entry.

3.) Prepare the necessary journal entry(s) Papa Doc Donuts would need to account for the January 1, 2013 acquisition of 17.5% of Frenchie's Beignets capital stock.{Hint- Something changes at this point, you should have more than one journal entry}

4.) Prepare Pap Doc Donuts December 31, 2013 journal entry(s)

5.) Prepare the necessary journal entry Papa Doc would need to account for the July 31, 2014 sell of 60,000 shares of Frenchie's Beignets for $5.50 per share.

Solutions

Expert Solution

Books of Papa Doc Donuts
Date Account Title Debit Credit
1..
Mar.31,2012 Investment in Frenchie's Beignets-AFS 157500
Cash 157500
(To record a 2.5% stake in the Co.)
Dec.31,2012 Unrealised holding loss on Frenchie AFS 33750
Valuation allowance/Investment in Frenchie's Beignets(AFS) 33750
(3.5-2.75)*45000
Jan 1.2013 Investment in Frenchie's Beignets 701250
Cash 701250
(255000*2.75)
Investment in Frenchie's Beignets 123750
Investment in Frenchie's Beignets-AFS 123750
(To record the investment under equity method)
(45000*2.75)
Dec.31,2013 Investment in Frenchie's Beignets 330040
Investment Income 330040
(1650200*20%)
Proportionate Income
July 31,2014 Investment in Frenchie's Beignets 63000
Investment Income 63000
($ 1575000*20%*60000 shares/300000 shares)
(Proportionate Income for the shares sold)
Cash(60000*5.5) 330000
Investment in Frenchie's Beignets((60000*2.75)+63000) 228000
Gain on sale of Inv.in Frenchie's stock 102000

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