On January 1, Year 5, Blake Corporation purchased 25% of the outstanding common shares of Stergis...

On January 1, Year 5, Blake Corporation purchased 25% of the outstanding common shares of Stergis Limited for $2,150,000.

The following relates to Stergis since the acquisition date:

Year	Net Income	Other Comprehensive Income	Dividends Paid
Year 5	$ 60,200	$12,600	$86,000
Year 6	172,000	34,400	86,000

Required:

(a) Assume that Blake is a public company and the number of shares held by Blake is enough to give it significant influence over Stergis. Prepare all the journal entries that Blake should make regarding this investment in Year 5 and Year 6.

Date	General Journal	Debit	Credit
January 1, Year 5
	(Click to select) Cash OCI - Equity method income Equity method income Investment loss Net income Unrealized gain on FVTPL investment Investment in Stergis Dividend income
	(Click to select) Investment in Stergis Net income Dividend income Investment loss OCI - Equity method income Equity method income Unrealized gain on FVTPL investment Cash
	To record purchase of 25% of Stergis.

December 31, Year 5
	(Click to select) Dividend income Unrealized gain on FVTPL investment Investment in Stergis Investment loss Net income Cash Equity method income OCI - Equity method income
	(Click to select) Investment in Stergis Dividend income Cash Net income Investment loss OCI - Equity method income Equity method income Unrealized gain on FVTPL investment
	To record 25% of Stergis’s Year 5 net income.

	(Click to select) Investment loss Net income Cash Unrealized gain on FVTPL investment Investment in Stergis OCI - Equity method income Dividend income Equity method income
	(Click to select) Investment in Stergis Equity method income Net income Unrealized gain on FVTPL investment Dividend income Investment loss Cash OCI - Equity method income
	To record 25% of Stergis’s Year 5 OCI

	(Click to select) Unrealized gain on FVTPL investment Equity method income Cash Investment loss Investment in Stergis Net income OCI - Equity method income Dividend income
	(Click to select) Dividend income OCI - Equity method income Investment in Stergis Equity method income Cash
	To record 25% of Stergis’s Year 5 dividends.

December 31, Year 6
	(Click to select) Net income Investment loss Equity method income Unrealized gain on FVTPL investment Investment in Stergis OCI - Equity method income Cash Dividend income
	(Click to select) Investment in Stergis Cash OCI - Equity method income Dividend income Investment loss Equity method income Unrealized gain on FVTPL investment Net income
	To record 25% of Stergis’s Year 6 net income.

	(Click to select) Dividend income Net income OCI - Equity method income Investment in Stergis Unrealized gain on FVTPL investment Cash Equity method income Investment loss
	(Click to select) OCI - Equity method income Investment loss Unrealized gain on FVTPL investment Equity method income Investment in Stergis Net income Cash Dividend income
	To record 25% of Stergis’s Year 6 OCI

	(Click to select) Net income Investment in Stergis Investment loss Equity method income OCI - Equity method income Dividend income Cash Unrealized gain on FVTPL investment
	(Click to select) Equity method income Unrealized gain on FVTPL investment OCI - Equity method income Cash Dividend income Net income Investment loss Investment in Stergis
	To record 25% of Stergis’s Year 6 dividends.

(b) Assume that Blake is a private company. Even though it has significant influence, it chose to use the cost method to account for its investment. Prepare all the journal entries that Blake should make regarding this investment in Year 5 and Year 6.

Date	General Journal	Debit	Credit
January 1, Year 5
	(Click to select) OCI - Equity method income Equity method income Investment loss Investment in Stergis Net income Cash Dividend income Unrealized gain on FVTPL investment
	(Click to select) Cash OCI - Equity method income Dividend income Equity method income Unrealized gain on FVTPL investment Net income Investment in Stergis Investment loss
	To record purchase of 25% of Stergis.

December 31, Year 5
	(Click to select) Investment in Stergis Investment loss Dividend income Equity method income Net income OCI - Equity method income Unrealized gain on FVTPL investment Cash
	(Click to select) Net income Unrealized gain on FVTPL investment Dividend income Cash Equity method income OCI - Equity method income Investment in Stergis Investment loss
	To record 25% of Stergis’s Year 5 dividends*

December 31, Year 6
	(Click to select) Cash Unrealized gain on FVTPL investment Investment in Stergis Equity method income OCI - Equity method income Dividend income Net income Investment loss
	(Click to select) Cash Unrealized gain on FVTPL investment Investment loss Equity method income Investment in Stergis Net income OCI - Equity method income Dividend income
	To record 25% of Stergis’s Year 6 dividends.

Solutions

Expert Solution

a.Assuming that Blake is a public company and the number of shares held by Blake is enough to give it significant influence over Stergis

Blake Corporation


Date	Journal Entries	Debit	Credit
Year 5, Jan 1	Investment in Stergis Limited	$2,150,000
	To Cash		$2,150,000
	(To record purchase of 25% of Stergis)

Year 5, Dec 31	Investment in Stergis Limited	$15,050
	To Investment Income		$15,050
	(To record 25% of Stergis year 5 net income) (25%*60,200)

Year 5, Dec 31	Investment in Stergis Limited Dr	$3,150
	To Other Comprehensive Income		$3,150
	(To record 25% of Stergis year 5 OCI) (25%*12,600)

Year 5, Dec 31	Cash Dr	$21,500.00
	To Investment in Stergis Limited		$21,500.00
	(To record 25% of Stergis year 5 Dividend) (25%*86,000)

Year 6, Dec 31	Investment in Stergis Limited Dr	$43,000
	To Investment Income		$43,000
	(To record 25% of Stergis year 6 net income) (25%*172,000)

Year 6, Dec 31	Investment in Stergis Limited Dr	$8,600
	To Other Comprehensive Income		$8,600
	(To record 25% of Stergis year 6 OCI) (25%*34,400)

Year 6, Dec 31	Cash Dr	$21,500
	To Investment in Stergis Limited		$21,500
	(To record 25% of Stergis year 6 Dividend) (25%*86,000)

b. Assuming that Blake is a private company. Even though it has significant influence, it chose to use the cost method to account for its investment.

Blake Corporation


Date	Journal Entries	Debit	Credit
Year 5, Jan 1	Investment in Stergis Limited Dr	$2,150,000
	To Cash		$2,150,000
	(To record purchase of 25% of Stergis)

Year 5, Dec 31	Cash Dr	$21,500
	To Dividend Income		$21,500
	(To record 25% of Stergis year 5 Dividend) (25%*86,000)

Year 6, Dec 31	Cash Dr	$21,500
	To Dividend Income		$21,500
	(To record 25% of Stergis year 6 Dividend) (25%*86,000)

-----------HOPE THIS IS HELPFUL

ekkarill92 answered 1 year ago

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