Question

In: Accounting

Visage Cosmetics, a public company, acquires 40% of Sage Hill Inc.’s 26,900 common shares for $19...

Visage Cosmetics, a public company, acquires 40% of Sage Hill Inc.’s 26,900 common shares for $19 per share on January 2, 2021. On June 15, Sage Hill pays a cash dividend of $26,900. On December 31, Sage Hill reports profit of $375,500 for the year. At December 31, Sage Hill shares are trading at $22 per share. Prepare the required journal entries to record the Sage Hill Inc. investment assuming significant influence exists. (Credit account titles are automatically indented when the amount is entered. Do not indent manually. If no entry is required, select "No Entry" for the account titles and enter 0 for the amounts. Record journal entries in the order presented in the problem.) Date Account Titles and Explanation Debit Credit choose a transaction date select an account title to record purchase of investment enter a debit amount enter a credit amount select an account title to record purchase of investment enter a debit amount enter a credit amount (To record purchase of investment.) choose a transaction date select an account title to record collection of dividend from associate enter a debit amount enter a credit amount select an account title to record collection of dividend from associate enter a debit amount enter a credit amount (To record collection of dividend from associate.)

Expert Solution

Visage Cosmetics has acquired 40% stake in Sage Hill with significant influence. So, we use equity method of accounting for investments. Equity method is used when investment in associate is between 20 to 50% and investor exerts significant influence over associate. Under this method, the investment is treated as asset for investor and value of asset increases with share of investor in the income generated by associate. Similarly, value decreases when associate incurs losses and pays cash dividend (because dividend is received in cash).

Number of shares acquired = 40% * 26900

= 10,760 shares

Value of investment = 10,760 shares * $19 per share

= $204,440

Total cash dividend declared on June 15= $26,900 on 26,900 shares

= $1 per share

Cash dividend received by Visage = $1 * 10,760 shares

= $10,760

Cash dividend received by investor reduces the value of investment since it represents portion of earnings which have been distributed by associate. Since investor also has equity holding in associate, it represents proportionate earnings of investor distributed.

Total profits declared on Dec. 31 = $375,500

Visage’s share = 40% * $375,500

= $150,200

Investment value increases by investor’s portion of net profits.

Further, no entry is required for change in share price of Sage Hill on Dec. 31 as under equity method, investment in associate is shown at “carrying value”,i.e., original investment cost + share of profit – cash dividend – share of loss, and not revalued at year-end according to market price.

	Journal entries in the books of Visage Cosmetics
Date	Particulars	Debit amount	Credit amount

Jan. 2,2021	Investment in associate	$204,440
	Cash		$204,440
	(To record purchase of investment)

Jun. 15,2021	Cash	$10,760
	Investment in associate		$10,760
	(Being cash dividend received)

Dec. 31,2021	Investment in associate	$150,200
	Equity income from investment in associate		$150,200
	(Being share in income generated by associate)

Dec. 31, 2021	No entry for change in market price of shares of Sage Hill

ekkarill92 answered 2 years ago

Sage Hill Inc. currently has 750,000 shares of common stock outstanding. Sage Hill Inc. is considering...

Sage Hill Inc. currently has 750,000 shares of common stock outstanding. Sage Hill Inc. is considering these two alternatives to finance its construction of a new $1.85 milion plant: 1. Issuance of 185,000 shares of common stock at the market price of $10 per share. 2. Issuance of $1.85 million, 8% bonds at face value. Complete the table. (Round earnings per share to 2 decimal places, e.g. $2.66.) Issue Stock Issue Bonds Income before interest and taxes $1,650,000 $1,650,000 Interest...

The comparative balance sheets for Sage Hill Company appear below: SAGE HILL COMPANY Comparative Balance Sheet...

The comparative balance sheets for Sage Hill Company appear below: SAGE HILL COMPANY Comparative Balance Sheet Assets Dec. 31, 2022 Dec. 31, 2021 Cash $31,100 $15,000 Accounts receivable 20,000 13,500 Inventory 34,900 19,100 Prepaid insurance 8,500 9,000 Stock investments -0- 18,000 Equipment 71,000 35,500 Accumulated depreciation-equipment (15,800 ) (12,300 ) Total assets $149,700 $97,800 Liabilities and Stockholder's Equity Accounts payable $28,600 $7,900 Bonds payable 39,100 48,800 Common stock 43,400 22,000 Retained earnings 38,600 19,100 Total liabilities and stockholder's equity $149,700...

A. Liu Company acquires Heller, Inc., by issuing 30,000 shares of $1 par common stock with...

A. Liu Company acquires Heller, Inc., by issuing 30,000 shares of $1 par common stock with a market price of $22 per share on the acquisition date and paying $150,000 cash. The assets and liabilities on Heller’s balance sheet were valued at fair values except equipment that was undervalued by $225,000. There was also an unrecorded patent valued at $45,000, as well as an unrecorded trademark valued at $60,000. In addition, the agreement provided for additional consideration, valued at $50,000,...

The management of Sage Hill Inc., a small private company that uses the cost recovery impairment...

The management of Sage Hill Inc., a small private company that uses the cost recovery impairment model, was discussing whether certain equipment should be written down as a charge to current operations because of obsolescence. The assets had a cost of $930,000, and depreciation of $320,000 had been taken to December 31, 2017. On December 31, 2017, management projected the undiscounted future net cash flows from this equipment to be $340,000, and its fair value to be $230,000. The company...

On January 1, 2022, Sage Hill Inc. had these stockholders’ equity balances. Common Stock, $1 par...

On January 1, 2022, Sage Hill Inc. had these stockholders’ equity balances. Common Stock, $1 par (2,500,000 shares authorized, 650,000 shares issued and outstanding) $650,000 Paid-in Capital in Excess of Par Value 1,420,000 Retained Earnings 698,000 Accumulated Other Comprehensive Income 50,000 During 2022, the following transactions and events occurred. 1. Issued 46,500 shares of $1 par value common stock for $2 per share. 2. Issued 61,000 shares of common stock for cash at $6 per share. 3. Purchased 22,500 shares...

You are provided with the following information taken from Sage Hill Inc.’s March 31, 2017, balance...

You are provided with the following information taken from Sage Hill Inc.’s March 31, 2017, balance sheet. Cash $ 12,280 Accounts receivable 23,120 Inventory 37,100 Property, plant, and equipment, net of depreciation 123,400 Accounts payable 22,910 Common stock 152,900 Retained earnings 12,320 Additional information concerning Sage Hill Inc. is as follows. 1. Gross profit is 24% of sales. 2. Actual and budgeted sales data: March (actual) $47,100 April (budgeted) 72,700 3. Sales are both cash and credit. Cash collections expected...

Sage Hill Inc. uses a periodic inventory system reports the following for the month of June....

Sage Hill Inc. uses a periodic inventory system reports the following for the month of June. Date Explanation Units Unit Cost Total Cost June 1 Inventory 120 $5 $600 12 Purchases 360 6 2,160 23 Purchases 210 7 1,470 30 Inventory 300 A sale of 340 units occurred on June 15 for a selling price of $9 and a sale of 50 units on June 27 for $10. (a) Your Answer Correct Answer Partially correct answer iconYour answer is partially...

Assume that the parent company acquires its subsidiary by exchanging 75,400 shares of its Common Stock,...

Assume that the parent company acquires its subsidiary by exchanging 75,400 shares of its Common Stock, with a fair value on the acquisition date of $30 per share, for all of the outstanding voting shares of the investee. In its analysis of the investee company, the parent values all of the subsidiary’s assets and liabilities at an amount equaling their book values except for a building that is undervalued by $480,000, an unrecorded License Agreement with a fair value of...

Sage Hill Inc. issues $7,750,000 of 6% bonds due in 9 years with interest payable at...

Sage Hill Inc. issues $7,750,000 of 6% bonds due in 9 years with interest payable at year-end. The current market rate of interest for bonds of similar risk is 8%. What amount will Sage Hill receive when it issues the bonds?

he following information is available for Sage Hill, Inc. for the year 2017. Administrative expense Officers'...

he following information is available for Sage Hill, Inc. for the year 2017. Administrative expense Officers' salaries $11,000 Depreciation of office furniture and equipment 8,400 Cost of goods sold 121,520 Rent revenue 2,500 Selling expense Delivery expense 4,400 Sales commissions 16,970 Depreciation of sales equipment 13,200 Sales revenue 231,000 Income tax 12,370 Interest expense 3,460 Common shares outstanding for 2017 total 23,000 (000 omitted). Prepare an income statement for Sage Hill Inc. for the year 2017 using the multiple-step form....