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On January 1, 2013, Plano Company acquired 8 percent (25,600 shares) of the outstanding voting shares...

On January 1, 2013, Plano Company acquired 8 percent (25,600 shares) of the outstanding voting shares of the Sumter Company for $460,800, an amount equal to Sumter’s underlying book and fair value. Sumter declares and pays a cash dividend to its stockholders each year of $160,000 on September 15. Sumter reported net income of $389,000 in 2013, $461,200 in 2014, $510,000 in 2015, and $485,600 in 2016. Each income figure can be assumed to have been earned evenly throughout its respective year. In addition, the fair value of these 25,600 shares was indeterminate, and therefore the investment account remained at cost.

     On January 1, 2015, Plano purchased an additional 32 percent (102,400 shares) of Sumter for $2,156,150 in cash and began to use the equity method. This price represented a $60,750 payment in excess of the book value of Sumter’s underlying net assets. Plano was willing to make this extra payment because of a recently developed patent held by Sumter with a 15-year remaining life. All other assets were considered appropriately valued on Sumter’s books.

     On July 1, 2016, Plano sold 10 percent (32,000 shares) of Sumter’s outstanding shares for $992,000 in cash. Although it sold this interest, Plano maintained the ability to significantly influence Sumter’s decision-making process. Assume that Plano uses a weighted average costing system.


Prepare the journal entries for Plano for the years of 2013 through 2016.

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Journal Entries in the books of Plano Company
Date Particulars Dr. $ Cr. $
01 January 2013 Investment in Sumter Co. 460800.00
To, Bank 460800.00
(Being entry passed for purchase of 8% stake i.e. 25,600 shares in Sumter Company)
15 September 2013 Bank A/C 12800.00
To, Dividend Income 12800.00
(Being Dividend Received on investment in Sumter Co.)
15 September 2014 Bank A/C 12800.00
To, Dividend Income 12800.00
(Being Dividend Received on investment in Sumter Co.)
01 January 2015 Investment in Sumter Co. 2095400.00
Goodwill 60750.00
To, Bank 2156150.00
(Being entry passed for purchase of 32% stake i.e. 102,400 shares in Sumter Company. Additional 60750$ paid on account of new patent to be written off over the period of 15 years i.e. It's remaining usefull life)
01 January 2015 Investment in Sumter Co. 63050.00
To, Investment Revenue 63050.00
(Being 8% stake bought as on 01/01/2013 valued as per equity method at the intrinsic value. (2095400*8/32)-460800=63050
15 September 2015 Bank A/C 64000.00
To, Investment in Sumter Co. 64000.00
(Being Dividend Received on 40% stake, accounted as per equity method by reducing investment value)
31 December 2015 Investment in Sumter Co. 204000.00
To, Investment Revenue 204000.00
(Being entry passed for 40% stake in revenue of 2015 of Sumter Co.)
31 December 2015 Goodwill written off 4050.00
To, Goodwill 4050.00
(Being 1/15 goodwill written off)
01 July 2016 Investment in Sumter Co. 97120.00
To, Investment Revenue 97120.00
(Being entry passed for 40% stake in revenue till June 30, 2016 of Sumter Co.)
01 July 2016 Bank A/C 992000.00
To, Investment in Sumter Co. 714092.50
To, Capital Reserve 277907.50
(Being 10% stake out of 40% stake sold. Gain of sale proced over Book value i.e. 10/40*2856370 taken to the Capital reserve account)
15 September 2016 Bank A/C 48000.00
To, Investment in Sumter Co. 48000.00
(Being Dividend Received on 30% stake, accounted as per equity method by reducing investment value)
31 December 2016 Investment in Sumter Co. 72840.00
To, Investment Revenue 72840.00
(Being entry passed for 30% stake in revenue from July 206 to December 2016 of Sumter Co.)
31 December 2016 Goodwill written off 4050.00
To, Goodwill 4050.00

ekkarill92 answered 1 year ago
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