Question

I GIVE THUMBS UPS

Ceres Corporation is considering making a significant long-term investment in Pisces Ltd., a young and very promising company. Ceres decides to make a smaller investment first, and if Pisces turns out to be successful, Ceres intends to make an additional investment to reach significant influence. Pisces has 200,000 shares authorized, 110,000 shares issued and 90,000 shares outstanding.

On January 1, 2016, Pisces issues Ceres 10,000 shares for $400,000 in cash (so now there are 120,000 shares issued, and 100,000 shares outstanding).

Additional information:

1. On November 1, 2016, Pisces declares a total cash dividend of $180,000.

2. Pisces reports $225,000 net income for 2014. Its stock price on December 31, 2016 is $38.

3. On November 1, 2017, Pisces announces a total dividend of $270,000 to be paid on January 2, 2018.

4. Pisces reports $360,000 net income for 2017. Its stock price on December 31, 2017 is $44.

5. On March 15, 2018, Ceres is approached by an investment fund which offers to buy all their Pisces shares for $55 per share, a 25% premium over the current stock price of $44. Ceres accepts the offer and sells the shares on that day.

Instructions

Assuming Ceres uses the fair value through net income model (FV–NI) to account for this investment:

a) Prepare the journal entries in Ceres’s books for the 2016 calendar year.

b) Prepare the journal entries in Ceres’s books for the 2017 calendar year.

c) Prepare the journal entries in Ceres’s books for the 2018 calendar year.

Answer 1

Part A

2016 entries

No.	Account titles and explanation	Debit	Credit
1	FV–NI Investment—Pisces	400000
	Cash		400000
	To record the initial investment on January 1, 2016
2	Cash	18000
	Dividend Income ($180,000 x 10,000 ÷ 100,000)		18000
	To record Ceres’s share of the dividend on November 1, 2016
3	Investment Income or Loss	20000
	FV–NI Investment—Pisces ($38 – $40) x 10,000)		20000
	To record holding loss on December 31, 2016

Part B

2017 entries

No.	Account titles and explanation	Debit	Credit
1	Dividend receivable	27000
	Dividend Income ($270,000 x 10,000 ÷ 100,000)		27000
	To record Ceres’s share of the dividend declared on November 1, 2017
2	FV–NI Investment—Pisces	60000
	Investment Income or Loss (($44 – $38) x 10,000)		60000
	To record holding gain on December 31, 2017

Part C

2019 entries

No.	Account titles and explanation	Debit	Credit
1	Cash	27000
	Dividend Receivable		27000
	To record receipt of dividend on January 2, 2019
2	Cash (55*10000)	550000
	FV–NI Investment—Pisces		440000
	Gain on sale of investment ($55 – $44) x 10,000 = $110,000		110000
	To record gain on sale of Pisces shares on March 15, 2019