Question

9. On September 28, 2019, Nillis purchased 1,600 shares of Gem City Electronics. Gem City operates five retail stores in the greater Dayton area. These stores would have great potential in opening up Nillis’s products to a new market. Gem City stock is readily marketable, but Nillis does not plan on selling the stock any time soon. At the time of the purchase, Gem City had issued and outstanding 6,400 shares of voting common stock. Nillis paid 24 per share for the stock. Total commissions on the purchase were $200. During 2019, Gem City’s net income was $180,000 and the company paid dividends of $0.30 per share in December of 2019. Gem City’s stock was selling for $29 per share at the end of 2019.

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Answer 1

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Nillis
Note: Nillis hold 1600 shares out of 6400 shares. i.e. 25% of total holding. It is also mentioned that he has no intention to sell the stock anytime soon. So equity method will be used.
It means investment will be recorded at cost and will be increased when Gem City Electronics earns income. It will be decreased if Gem City Electronics distributed any dividend.
Closing price of $ 29 is of no use here. Because investment should not be revalued as equity method is used.
Journal Entries
Particulars	Date	Account	Debit $	Credit $
When shared purchased	28-Sep-19	Investment in Gem City Electronics	38,400.00		1,600 shares @ $ 24.
		Cash		38,400.00
When commission Expense paid	28-Sep-19	Commission Expense	200.00
		Cash		200.00
Commission Expense to be added to cost of investment	28-Sep-19	Investment in Gem City Electronics	200.00
		Commission Expense		200.00
For Dividend income	31-Dec-19	Dividend Receivable	480.00		1,600 shares @ $ 0.30.
		Investment in Gem City Electronics		480.00
When dividend received	31-Dec-19	Cash	480.00
		Dividend income		480.00
For Net Income of Gem City Electronics	31-Dec-19	Investment in Gem City Electronics	45,000.00		25% of $ 180,000.
		Equity in Gem City Electronics		45,000.00
For revaluation of investment	No entry. As mentioned above closing price of $ 29 is of no use here. Because investment should not be revalued as equity method is used.