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Heidebrecht Design acquired 30% of the outstanding common stock of Quayle Company on January 1, 2017,...

Heidebrecht Design acquired 30% of the outstanding common stock of Quayle Company on January 1, 2017, by paying $610,500 for the 40,700 shares. Quayle declared and paid $0.40 per share cash dividends on March 15, June 15, September 15, and December 15, 2017. Quayle reported net income of $315,000 for the year. At December 31, 2017, the market price of Quayle common stock was $26 per share.

Prepare the journal entries for Heidebrecht Design for 2017 assuming Heidebrecht Design cannot exercise significant influence over Quayle. (Use the cost method and assume that Quayle common stock should be classified as a trading security.)

Prepare the journal entries for Heidebrecht Design for 2017, assuming Heidebrecht Design can exercise significant influence over Quayle. Use the equity method

Indicate the balance sheet and income statement account balances at December 31, 2017, under each method of accounting.

Solutions

Expert Solution

1. Cost method-Trading security

Date Account Titles and Explanation Debit Credit
Jan. 1, 2017 Investment in Quayle Company 610500
Cash 610500
(To record purchase of investment)
Mar. 15, 2017 Cash ($0.40 x 40700) 16280
Dividend revenue 16280
(To records dividend received on investment)
Jun. 15, 2017 Cash ($0.40 x 40700) 16280
Dividend revenue 16280
(To records dividend received on investment)
Sep. 15, 2017 Cash ($0.40 x 40700) 16280
Dividend revenue 16280
(To records dividend received on investment)
Dec. 15, 2017 Cash ($0.40 x 40700) 16280
Dividend revenue 16280
(To records dividend received on investment)
Dec. 31, 2017 Investment in Quayle Company 447700
Unrealized gain on trading security 447700
[($26 x 40700) - $610500]
(To record trading security at fair value)
December 31, 2017 account balances:
Balance Sheet:
Investment in Quayle Company (40700 x $26) 1058200
Income Statement:
Dividend revenue ($16280 x 4) 65120
Unrealized gain on trading security 447700

2. Equity method-Significant influence

Date Account Titles and Explanation Debit Credit
Jan. 1, 2017 Investment in Quayle Company 610500
Cash 610500
(To record purchase of investment)
Mar. 15, 2017 Cash ($0.40 x 40700) 16280
Investment in Quayle Company 16280
(To record dividend received on investment)
Jun. 15, 2017 Cash ($0.40 x 40700) 16280
Investment in Quayle Company 16280
(To record dividend received on investment)
Sep. 15, 2017 Cash ($0.40 x 40700) 16280
Investment in Quayle Company 16280
(To record dividend received on investment)
Dec. 15, 2017 Cash ($0.40 x 40700) 16280
Investment in Quayle Company 16280
(To record dividend received on investment)
Dec. 31, 2017 Investment in Quayle Company 94500
Investment income ($315000 x 30%) 94500
(To record share in Quayle Company's net income)
December 31, 2017 account balances:
Balance Sheet:
Investment in Quayle Company [$610500 - ($16280 x 4) + $94500] 639880
Income Statement:
Investment income 94500

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