Question

In: Accounting

Heidebrecht Design acquired 20% of the outstanding common stock of Quayle Company on January 1, 2017,

Heidebrecht Design acquired 20% of the outstanding common stock of Quayle Company on January 1, 2017, by paying $800,000 for the 30,000 shares. Quayle declared and paid $0.30 per share cash dividends on March 15, June 15, September 15, and December 15, 2017. Quayle reported net income of $320,000 for the year. At December 31, 2017, the market price of Quayle common stock was $34 per share.

 

Instructions

(a) 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.)

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

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

Solutions

Expert Solution

a)

Journal entries for Heidebrecht for 2017

 

Assuming Heidebrecht cannot exercise significant influence over Quayle:

Date Particulars Debit ($) Credit ($)
       
1.1.2017 Investment in Quayle co. Dr. 800,000  
  To Cash a/c   800,000
  (being amount invested)    
       
1.3.2017 Cash a/c Dr. 9,000  
  To dividend revenue   9,000
  (Being dividend received)    
       
1.6.2017 Cash a/c Dr. 9,000  
  To dividend revenue   9,000
  (Being dividend received)    
       
1.9.2017 Cash a/c Dr. 9,000  
  To dividend revenue   9,000
  (Being dividend received)    
       
1.12.2017 Cash a/c Dr. 9,000  
  To dividend revenue   9,000
  (Being dividend received)    
       
  Investment in Quayle co Dr. 220,000  
  To Gain on fair value   220,000
  (Being gain on measuring investment at market value)    

 

b) Journal entries for Heidebrecht for 2017

 

Assuming Heidebrecht can exercise significant influence over Quayle :

Date Particulars Debit ($) Credit ($)
       
1.1.2017 Investment in Quayle co. Dr. 800,000  
  To Cash a/c   800,000
  (Being amount invested)    
       
1.3.2017 Cash a/c Dr. 9,000  
  To dividend revenue   9,000
  (Being dividend received)    
       
1.6.2017 Cash a/c Dr. 9,000  
  To dividend revenue   9,000
  (Being dividend received)    
       
1.9.2017 Cash a/c Dr. 9,000  
  To dividend revenue   9,000
  (Being dividend received)    
       
1.12.2017 Cash a/c Dr. 9,000  
  To dividend revenue   9,000
  (Being dividend received)    
       
  Investment in Quayle co. Dr. 96,000  
  To Share of results associate company   96,000
       

 

C) Cost method

Investment in Quayle Company $1,020,000(balance sheet)

Fair value gain on investments $220,000 (income statement)

Dividend revenue $36,000 (income statement)

 

Equity method

Share of results in associate company $96,000 (income statement)

 

Working notes:

 

1) Calculation of dividend received :

No. of shares held = 30,000

Dividend per share = $0.30

The dividend per quarter = 30,000* $0.30 = $9,000

 

2) In equity method stock investment is 30,000* $34 per share = $1,020,000

Unrealized gain equity is $1,020,000 – $800,000 = $220,000

 

3) Dividend revenue is 4*$9,000 = $36,000

a)

Journal entries for Heidebrecht for 2017

 

Assuming Heidebrecht cannot exercise significant influence over Quayle:

 

Junaid answered 2 years ago
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