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On July 1, 2018, the Churab Company paid $190,000 in return for a 5% interest (9,500...

On July 1, 2018, the Churab Company paid $190,000 in return for a 5% interest (9,500 shares) in the UNCY Corporation’s common stock. On December 21, 2018, UNCY paid all of its stockholders a cash dividend of $1.00 a share. On December 31, 2018, UNCY’s common stock had a market value of $35 a share. On August 31, 2019, UNCY declared a 3-for-1 stock split of its common stock. On November 30, 2019, UNCY issued 100,000 shares of preferred stock that would be convertible, at the option of its stockholders, into 60,000 shares of common stock no earlier than 2022. On December 31, 2019, UNCY’s common stock had a market value of $32 a share. On February 1, 2020, Churab sold 4,000 shares of its UNCY stock for $68 a share. On December 21, 2020, UNCY paid all of its stockholders a cash dividend of $1.00 a share. On December 31, 2020, UNCY’s common stock had a market value of $70 a share. Provide all of the journal entries that the Churab Company would make for the investment activity described above.

Note: this is different in the previous one, please do not copy and paste the answer because it will not match

Solutions

Expert Solution

Journal entry in the books of Churab company for investment made in shares ;

A) When investment in UNCY Corporation common stock is done :

1 JULY 2018

Investment in UNCY common stock(9500 shares) 190000
Bank 190000

B)When dividend received:

21 DEC 2018

Cash 9500
Divend income 9500

(dividend of $1 per received for 9500 share)

For adjustment in market value of shares :

Short term investment is adjusted on the market value.so its inc is increaseor decrease in value charged toill be P& L to show its real picture. So the entry for adjustment will be

Short term iinvestment in UNYC 142500
Unnrealised gain on investment 142500

(Market value of share has increased from $20 ie(19000/9500) to 35

so gain is( 35-20)*9500

31 AUGUST 2019

When stock split declared

Stock split increases the number of shares and dercrease in par value of shares to be reduced based on its propotion of split .But the investment amount remain same . So no journal entry is to be recorded.IN this case 3 in 1 stock split the investment of 9500 of shares increase to 9500*3 to 28500 and value of share will be reduced by 1/3 so no dollar value is affected.Value of a share will be $ 11.3(35/3)

Adjustment in market value of shares

31 DECEMBER 2019

After stock split value of share is 11.3.Its market value has been increased to 32. So neccessary entry to be done adjst value of share.

Short investment in UNYC(20.7*28500) 589950
Unrealised gain(20.7*28500) 589950

Un realised gain of share arise due change market value has increase from 11.3 to32 and entry is passed to reflect its change in investment

When 4000 shares sold for $ 68

22 FEBRUVARY 2020

Shares sold for 68 which is greater than existing value. so profit on sale is sale credited on the difference in book value(32).For balance existin

Cash (4000*68) 272000
short term investment(32*4000) 128000
Profit on sale(36*4000) 144000

When dividend paid

21 DECEMBER 2020

cash 24500
Dividend income 24500

31 DECEMBER 2020

Market value of share has been increased from existing book value to $ 70

Short term investment(24500* 931000
Unrealised gain 931000

(Market value of shares hase been increase to from 32 to 70)

ekkarill92 answered 1 year ago
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