Question

In: Accounting

Fortran Inc. purchased 100,000 shares, representing more than 20%, of Cobol Company on January 1, 2016....

Fortran Inc. purchased 100,000 shares, representing more than 20%, of Cobol Company on January 1, 2016. On July 1, 2016, Cobol paid dividends. The cost of the purchase, Cobol’s net income and total dividends for 2016 are given below. The market price of Cobol’s stock at 12/31/16 was $60 per share.

25% purchased, $5,125,000 cost, $600,000 total dividends paid, $3,000,000 Net Income

a.) What method of accounting should Fortran Inc. use to account for the investment in Cobol.

b.) Prepare the journal entry for the receipt of dividends for Fortran on July 1, 2016.

c.) Prepare the necessary journal entry (s) for Fortran as of December 31, 2016.

d.) What is the value of the investment in Cobol on Fortran’s balance sheet at December 31, 2016, if Fortran did not elect the fair value option?

e.) What is the value of the investment in Cobol on Fortran’s balance sheet at December 31, 2016, if Fortran elected the fair value option? Prepare the necessary journal entry.

Solutions

Expert Solution

a)since the percentage of holding is more than 20% it gives fortan Inc.significant influence ,therefore equity method is appropriate.

B)

Date Account debit creidt
July 1 2016 cash 150000
Investment in associate /cobol 150000
[being share of dividend recorded 600000*.25]
december 31 2016 Investment in associate /cobol 750000
share in net income of cobol 750000
[being share of net income recorded 3000000*.25]

d) value of the investment in Cobol on Fortran’s balance sheet at December 31, 2016 = cost + share of net income -dividend

   = 5125000+750000- 150000

    = 5,725,000

e)alue of the investment in Cobol on Fortran’s balance sheet at December 31, 2016, if Fortran elected the fair value option = number of shares *fair value

         = 100000 *60

            = $ 6,000,000

Date Account Debit credit
december 31 2016 Fair value adjustment 875000
Unrealized holding gain on investment 875000
[increase in fair value recorded 6000000-5125000]

ekkarill92 answered 1 year ago
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