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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