Question

On January 2, 2017, Splurge Corp. paid $528,000 for 24% (48,000 shares) of the outstanding common stock of Indulge Co. Splurge used the equity method to account for the investment. At the end of 2017, the balance in the investment account was $720,000. On January 2, 2018, Splurge sold 12,000 shares of Indulge stock for $12.50 per share. For 2018, Indulge reported net income of $218,000 and paid dividends of $40,000.

a) Prepare the journal entry to record the sale of the 12,000 shares. Please show calculations so that partial credit can be granted.

b) After the sale has been recorded, what is the balance in the investment account? Please provide an appropriate table with enough information.

c) What percentage of Indulge Co. stock does Splurge own after selling the 12,000 shares? Please provide an appropriate table with enough information.

d) Becauseofthesaleofstock,Splurgecannolongerexercisesignificantinfluenceovertheoperationsof Indulge. What effect will this have on Splurge’s accounting for the investment? (i.e. what is the name of the accounting method that will be used – NOT a description)

e) Prepare Splurge’s journal entries related to the investment for the rest of 2018. Please show calculations.

Answer 1

Prepare the journal entry to record the sale of the 12,000 shares. Please show calculations so that partial credit can be granted.

Particulars	Debit	Credit
Cash A/c	$ 150,000
Profit on Sale	$ 30,000
Investment A/c		$ 180,000

After the sale has been recorded, what is the balance in the investment account? Please provide an appropriate table with enough information.

• After the sale, the balance in investment account be = $720,000 – 180,000 = $ 540,000

?What percentage of Indulge Co. stock does Splurge own after selling the 12,000 shares? Please provide an appropriate table with enough information

• 0.24*X = 48000;

  X = 200,000 shares

  So, Now (48000-12000)/200,000 = 18% shares

Becauseofthesaleofstock,Splurgecannolongerexercisesignificantinfluenceovertheoperationsof Indulge. What effect will this have on Splurge’s accounting for the investment? (i.e. what is the name of the accounting method that will be used – NOT a description)

The share now have to be reported as per The Fair Value Method

Part E

Items	Debit	Credit
Cash	= 0.18 * 40000 = 7200
Dividend Income		7200
Investment in Oliver	=0.18*218000 = 39240
Investment Income		39240