In: Accounting
Exercise 22-23
Sandhill Corp. was a 30% owner of Teal Company, holding 216,000 shares of Teal’s common stock on December 31, 2019. The investment account had the following entries.
Investment in Teal |
|||||
1/1/18 Cost | $3,050,000 | 12/6/18 Dividend received | $150,000 | ||
12/31/18 Share of income | 400,000 | 12/5/19 Dividend received | 240,000 | ||
12/31/19 Share of income | 500,000 |
On January 2, 2020, Sandhill sold 108,000 shares of Teal for
$3,360,000, thereby losing its significant influence. During the
year 2020, Teal experienced the following results of operations and
paid the following dividends to Sandhill.
Teal |
Dividends Paid |
|||
2020 | $310,000 | $47,000 |
At December 31, 2020, the fair value of Teal shares held by
Sandhill is $1,820,000. This is the first reporting date since the
January 2 sale.
(b) Compute the carrying amount of the investment
in Teal as of December 31, 2020 (prior to any fair value
adjustment).
Carrying amount | $ |
(c) Prepare the adjusting entry on December 31,
2020, applying the fair value method to Sandhill’s long-term
investment in Teal Company securities. (Credit account
titles are automatically indented when 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.)
Date |
Account Titles and Explanation |
Debit |
Credit |
Dec. 31, 2020 | |||
b) Computation of Carrying amount of investment as on December 31, 2020 | |
Investment value as on 31.12.2019: | |
$ | |
Cost | $ 3,050,000 |
Share of Income 12/31/18 | $ 400,000 |
Share of Income 12/31/19 | $ 500,000 |
$ 3,950,000 | |
Dividends Received on 12/6/18 | $ 150,000 |
Dividends Received on 12/5/19 | $ 240,000 |
Investment value as on 31.12.2019 for 216000 shares | $ 3,560,000 |
Investment value for 108000 shares sold (3560000/216000*108000) | $ 1,780,000 |
The Investment value as on 01.01.2020 for 108000 shares | $ 1,780,000 |
Add: Profit for the year 2020 (310000*15%) | $ 46,500 |
$ 1,826,500 | |
Less: Dividends received | $ 47,000 |
Carrying Amount as on December 31, 2020($) | $ 1,779,500 |
FMV Investment | $ 1,820,000 | ||
Carrying Amount | $(1,779,500) | ||
$ 40,500 | |||
Date: | Accounts Titles and Explanation | Debit | Credit |
31-Dec-20 | Investment in Sunland securities | $40,500 | |
Capital Reserve | $40,500 |