Question

Sparkle Sparkle, Inc. purchased 40,000 shares of Big Energy Corporation on January 1, 2019 for $20 per share. Big Energy Corporation declared and paid a cash dividend of $0.60 per share in 2019 and $0.70 per share in 2020. Sparkle Sparkle, Inc. obtained the financial statements of Big Energy Corporation, and determined their share of reported net income was $40,000 and $48,000 for 2019 and 2020, respectively. The market price of Big Energy Corporation’s stock was $14 per share and $16 per share on 12/31/2019 and 12/31/2020, respectively.

Required:

1. Prepare all journal entries for the above transactions, assuming Sparkle Sparkle, Inc. has significant influence over the operations of Big Energy Corporation.
2. Prepare all journal entries for the above transactions, assuming Sparkle Sparkle, Inc. does not have significant influence over the operations of Big Energy Corporation and (a) the fair value is readily determinable, and (b) the fair value is NOT readily determinable.
3. Complete the following schedule. Indicate which method of accounting for investments should be used and show what would have been reported on the December 31, 2019 financial statements. Prepare the Statement of Cash Flows under both the direct and indirect method.

	Significant Influence	No Signi-	ficant Influence
		FV Determinable	FV not determinable
Method of Accounting:
Balance Sheet
Income Statement
Statement of Comprehensive Income
Statement of Cash Flows

Answer 1

1. Sparkle Sparkle Inc. has significant influence :

Date	Account Titles	Debit	Credit
		$	$
Jan 1, 2019	Equity Investments ( 40,000 x $ 20 )	800,000
	Cash		800,000
Dec 31, 2019	Cash ( 40,000 x $ 0.60)	24,000
	Equity Investments		24,000
Dec 31, 2019	Equity Investments	40,000
	Investment Income: I/S		40,000
Dec 31, 2020	Cash ( 40,000 x $ 0.70)	28,000
	Equity Investments		28,000
Dec 31, 2020	Equity Investments	48,000
	Investment Income : I/S		48,000

2. a. Sparkle Sparkle Inc. does not have significant influence, and the fair value is readily determinable:

Date	Account Titles	Debit	Credit
		$	$
Jan 1, 2019	Equity Investments: AFS	800,000
	Cash		800,000
Dec 31, 2019	Cash	24,000
	Dividend Revenue		24,000
Dec 31, 2019	Unrealized Holding Loss on AFS Investments: B/S	240,000
	Fair Value Adjustment : AFS Investments		240,000
Dec 31, 2020	Cash	28,000
	Dividend Revenue		28,000
Dec 31, 2020	Fair Value Adjustment: AFS Investments	80,000
	Unrealized Holding Gain on AFS Investments: B/S		80,000

2. b. Sparkle Sparkle Inc. does not have significant influence, and the fair value is not readily determinable:

Date	Account Titles	Debit	Credit
		$	$
Jan 1, 2019	Equity Investments: AFS	800,000
	Cash		800,000
Dec 31, 2019	Cash	24,000
	Dividend Revenue		24,000
Dec 31, 2019	Unrealized Holding Loss on AFS Investments: I/S	240,000
	Fair Value Adjustment		240,000
Dec 31, 2020	Cash	28,000
	Dividend Revenue		28,000
Dec 31, 2020	Fair Value Adjustment	80,000
	Unrealized Holding Gain on AFS Investments: I/S		80,000

3.

	Significant Influence	No Significant Influence
		FV determinable	FV not determinable
Method of Accounting	Equity Method	FMV Method	Cost Method
Balance Sheet	$ 816,000	$ 560,000	$ 800,000
Income Statement	Inv. Inome : $ 40,000	Div. Rev : $ 24,000	Div Revenue: $ 24,000, Unrealized Loss : $ (240,000)
Statement of Comprehensive Income	NA	$ 240,000 loss	NA
Statement of Cash Flows	CFI : $ (776,000)	CFI: $ ( 776,000)	CFI: $ ( 776,000)

Net cash flows from investing activities for the year ended December 31, 2019 = $ (800,000) + $ 24,000 = $ ( 776,000).

Carrying value of investment in the balance sheet as on December 31, 2019 under the equity method = $ 800,000 - $ 24,000 + $ 40,000 = $ 816,000

Carrying value of investment in the balance sheet as on December 31, 2019 under the FV method = $ 800,000 - $ 240,000 = $ 560,000.

Carrying value of investment in the balance sheet as on December 31, 2019 under the cost method : $ 800,000.

Statement of Comprehensive Income for the year ended December 31, 2019 under the FMV method = 40,000 x $ ( 14 - 20 ) = $ (240,000)