Question

Use the following information for the Problems below.

[The following information applies to the questions displayed below.]

Selk Steel Co., which began operations in Year 1, had the following transactions and events in its long-term investments.

Year 1

Jan.		5		Selk purchased 50,000 shares (20% of total) of Kildaire's common stock for $1,500,000.
Oct.		23		Kildaire declared and paid a cash dividend of $2.40 per share.
Dec.		31		Kildaire’s net income for the year is $1,112,000 and the fair value of its stock at December 31 is $34 per share.

Year 2

Oct.		15		Kildaire declared and paid a cash dividend of $3.30 per share.
Dec.		31		Kildaire’s net income for the year is $1,166,000 and the fair value of its stock at December 31 is $37 per share.

Year 3

Jan.

2

Selk sold 2% (equal to 1,000 shares) of its investment in Kildaire for $68,000 cash.

Problem 15-5A Accounting for long-term investments in stock with significant influence LO P5

Required:
1. Prepare journal entries to record these transactions and events for Selk. Assume that Selk has a significant influence over Kildaire with its 20% share of stock.
Year 1 Year 2 and Year 3

Answer 1

Answer:

Year (1)                                              

Date	Accounts & Explanations	Debit	Credit
Jan,5	Equity Investments- Kildaire	$1,500,000
	Cash		$1,500,000
	(To record securities purchased)
Oct.23	Cash (50,000*$2.40)	$120,000
	Equity Investments- Kildaire		$120,000
	(To record dividend revenue earned)
Dec,31	Equity Investments- Kildaire( $1,112,000*20%)	$222,400
	Equity Income		$222,400
	(To record net income earned)

Year (2)

Date	Accounts & Explanations	Debit	Credit
Oct ,15	Cash (50,000*$3.30)	$165,000
	Equity Investments- Kildaire		$165,000
	(To record dividend revenue earned)
Dec,31	Equity Investments- Kildaire( $1,166,000*20%)	$233,200
	Equity Income		$233,200
	(To record net income earned)

   Year (3)

Date	Accounts & Explanations	Debit	Credit
Jan,2	Cash	$68,000
	Gain on sale of Equity Investments- Kildaire		$34,588
	Equity Investments- Kildaire		$33,412
	(To record sale of investment)

Working note:

Calculation of Carrying Amount.

Purchase Price	$ 1,500,000
Less: Dividend Year 1	$ (120,000)
Less: Dividend Year 2	$ (165,000)
Add: Net Income Year 1	$ 222,400
Add: Net Income Year 2	$233,200
Carrying Amount	$ 1,670,600
Total Shares	50,000
Carrying Value per share($1,670,600/50,000)	$33.412
Sold Shares Carrying Value(1,000*$33.412)	$33,412