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On January 2, 2018, Acquirer Co acquires 10,000 shares (5%) of Target Inc’s shares of common...

On January 2, 2018, Acquirer Co acquires 10,000 shares (5%) of Target Inc’s shares of common stock for $42 a share. Acquirer held the Target shares until January 9, 2020 when it sells the stock for $48 a share. Target reported the following earnings/loss per share, paid the following cash dividends per share, and the trading price of each share of its common stock are as follows: Year Earnings/Loss per share 12/31/Cash Dividends per sh Fair Mkt Value 12/31 per sh 2018 $7 earnings per share $4/share $50/share 2019 $3 loss per share $2/share $44/share INSTRUCTIONS; 1a. Prepare the journal entries that Acquirer would make during 2018 and 2019 for its investment in T assuming that Acquirer’s ownership of Target was insignificant. 1b. Prepare the journal entry that Acquirer Co. would make on January 9, 2020 to record its sale of the Target stock. 2a. Prepare the journal entries that Acquirer Co. would make during 2018 and 2019 for its investment in Target assuming INSTEAD that Acquirer did not know the fair market value of the Target stock (and its ownership was insignificant.) 2b. Prepare the journal entry that Acquirer Co. would make on January 9, 2020 to record its sale of the Target stock 3a. Assume INSTEAD that Acquirer elects two directors to the board and, that on 1/9/18, Acquirer appraised the net assets of Target and determined that the fair market value of Target’s patent (which had a remaining life of 10 years) exceeded its book value by $800,000 and that all of Target’s other assets had book values equal to their fair market values. Prepare the journal entries that Acquirer Co. would make during 2018 and 2019. 3b. Prepare the journal entry that Acquirer Co. would make on January 9, 2020 to record its sale of the Target stock

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Expert Solution

1a. Prepare the journal entries that Acquirer would make during 2018 and 2019 for its investment in T assuming that Acquirer’s ownership of Target was insignificant.

Note: Since the investment is less than 20%, it is treated as insignificant and is accounted using cost method

  1. 02 Jan 2018        Investment in Shares     Dr           : $420,000

To Bank:$420,000

(Being investment made in 10000 equity shares of M/s Target at $42 per share)

  1. 31 Dec 2018        Bank                                      Dr           : $40,000

Investment income                        :               $40,000

(Being dividend received from investment in Target)

  1. 31 Dec 2018        Investment in shares     Dr                           : $80,000

Unrealised income on investment           :               $80,000

(Being investments in Target reinstated at market value of $ 50 each)

  1. 31 Dec 2019        Bank                                      Dr           : $20,000

Investment income                        :               $20,000

(Being dividend received from investment in Target)

  1. 31 Dec 2019        Unrealised loss on investment   Dr                           : $60,000

Investment in shares                                                     :               $60,000

(Being investments in Target reinstated at market value of $44 each)

1b. Prepare the journal entry that Acquirer Co. would make on January 9, 2020 to record its sale of the Target stock.

  1. 09 Jan 2020         Bank                                      Dr           :$480,000

Investment in shares                     :               $440,000

Gain on investments                      :               $40,000

                                                (Being investment in Target sold at $48 each)

2a. Prepare the journal entries that Acquirer Co. would make during 2018 and 2019 for its investment in Target assuming INSTEAD that Acquirer did not know the fair market value of the Target stock (and its ownership was insignificant.)

When market value is not available, the investment can be shown at historical cost. Below is the entry scheme.

  1. 02 Jan 2018         Investment in Shares     Dr           : $420,000

To Bank:$420,000

(Being investment made in 10000 equity shares of M/s Target at $42 per share)

  1. 31 Dec 2018        Bank                                      Dr           : $40,000

Investment income                        :               $40,000

(Being dividend received from investment in Target)

  1. 31 Dec 2019        Bank                                      Dr           : $20,000

Investment income                        :               $20,000

(Being dividend received from investment in Target)

2b. Prepare the journal entry that Acquirer Co. would make on January 9, 2020 to record its sale of the Target stock

  1. 09 Jan 2020         Bank                                      Dr           :$480,000

Investment in shares                     :               $420,000

Gain on investments                      :               $60,000

                                                (Being investment in Target sold at $48 each)

3a. Assume INSTEAD that Acquirer elects two directors to the board and, that on 1/9/18, Acquirer appraised the net assets of Target and determined that the fair market value of Target’s patent (which had a remaining life of 10 years) exceeded its book value by $800,000 and that all of Target’s other assets had book values equal to their fair market values. Prepare the journal entries that Acquirer Co. would make during 2018 and 2019.

  1. 02 Jan 2018         Investment in Shares     Dr           : $420,000

To Bank:$420,000

(Being investment made in 10000 equity shares of M/s Target at $42 per share)

  1. 31 Dec 2018        Investment in shares     Dr                           : $80,000

Unrealised income on investment           :               $80,000

(Being investments in Target reinstated for market value appraisal-10% of $800K)

  1. 31 Dec 2018        Bank                                      Dr           : $40,000

Investment income                        :               $40,000

(Being dividend received from investment in Target)

  1. 31 Dec 2018        No entry required as market value is equal to book value.
  1. 31 Dec 2019        Bank                                      Dr           : $20,000

Investment income                        :               $20,000

(Being dividend received from investment in Target)

                                                                                          

  1. 31 Dec 2019        Unrealised loss on investment   Dr                           : $60,000

Investment in shares                                                     :               $60,000

(Being investments in Target reinstated at market value of $44 each)

3b. Prepare the journal entry that Acquirer Co. would make on January 9, 2020 to record its sale of the Target stock

  1. 09 Jan 2020         Bank                                      Dr           :$480,000

Investment in shares                     :               $440,000

Gain on investments                      :               $40,000

                                                (Being investment in Target sold at $48 each)

ekkarill92 answered 11 months ago
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