Investments
Practice As You Learn
Practice As You Learn
Practice Problem 1 – Investments
On January 2nd, CY, Barrier Company purchased 80,000 shares of common stock of Jacque Company representing 20% of the outstanding common shares of the company for $1,000,000. For this year, Jacque Company reported net income of $300,000 and declared and paid cash dividends of $100,000. The fair market value of the shares was $15 per share (bid ask quote) on December 31st of this year.
A. Prepare all journal entries related to the investment for Barrier Company the current year, given the company does not have significant influence
B. Prepare all journal entries related to the investment for Barrier Company for the current year, given the company does have significant influence
Check Your Answers
A. Use the FMV method because of “no significant influence” and there is a reliable FMV (bid ask quote).
Record the purchase of the investment:
Investment $1,000,000
Cash $1,000,000
Do these two things for the “Fair Market Value Method”:
1) Record the change in fair market value
Combine two accounts to report the investment at FMV.
Investment at cost
+ Fair Value Adjustment
= Fair Market Value
Use the “Unrealized Holding G/L” account to record the current period change
Fair Value Adjustment $200,000
Unrealized Holding G/L – I.S. $200,000
(80,000 shares x $15 = $1,200,000 – $1,000,000 = $200,000 increase)
2) Record the dividend received
Cash $20,000
Dividend revenue $20,000
(Total dividend paid $100,000 x 20% owned = $20,000)
B. Use the equity method because they have significant influence. Ignore the fair market value when you use this method
Record two things for the Equity Method (there is no difference in BV and FMV):
1) Record the investor’s share of their income or loss
Investment $60,000
Investment revenue $60,000
$300,000 x 20% = $60,000
Investee’s income x % owned = investors share
2) Record the investor’s share of the dividend received
$100,000 x 20% = $20,000
The total dividend investee paid x % investor own
Cash $20,000
Investment $20,000
3) There is no difference between the FMV and BV on the date of purchase in this situation. No entry required.
ABC company purchased XYZ company’s bonds for $120,000 and received $5,000 interest income each year. The fair market value at the end of the 1st year and 2nd year is $130,000 and $110,000, respectively. ABC intends to hold the investment in the bonds for a minimum of 3 years.
A. Record the purchase of the investment in XYZ.
B. Record the transactions required for the 1st year
C. Record the transactions required for the 2nd year.
D. Record the sale of the bonds at the beginning of the 3rd year for $105,000.
Check Your Answers
A.
Investment $120,000
Cash $120,000
Use the fair market value method – available for sale method because they intend to hold the bonds for 3 years.
B. Year 1:
1) Record the adjustment to fair market value to owners’ equity
| Fair Value Adjustment | $10,000 |
| Unrealized Holding G/L – OE | $10,000 |
2) Record the interest earned and received
Cash $5,000
Interest Income $5,000
C. Year 2:
1) Record the adjustment to fair market value to owners’ equity
Unrealized Holding G/L – OE $20,000
Fair Value Adjustment $20,000
| Unrealized Holding G/L – OE | $20,000 |
| Fair Value Adjustment | $20,000 |
2) Record the interest earned and received
Cash $5,000
Interest Income $5,000
At the end of the 2nd year – the balance sheet would report the following:
Investment: $110,000 at FMV
Unrealized Holding Loss – OE $10,000
($10,000 gain – $20,000 loss)
D. To record a sale of an investment in the bond:
Unrealized Holding G/L – OE $5,000
(From $110K to $105K)
Fair Value Adjustment $5,000
Realized G/L $ 15,000
Fair Value Adjustment $ 15,000
Cash $105,000
Investment $120,000
Unrealized Holding G/L – OE $ 15,000
ABC company purchased 40,000 shares of stock in XYZ company for $12 per share
and received a dividend each year of $1.50 per share. XYZ company reported income of $200,000 for the first year and a loss of $125,000 for the second year. The fair market value at the end of the 1st year is $13 per share and at the end of the 2nd year is $11 per share. ABC intends to hold the stock for a minimum of 3 years and the investment represents a 40% ownership.
A. Record the purchase of the investment in XYZ.
B. Record the transactions required for the 1st year
C. Record the transactions required for the 2nd year.
D. Determine the balance in the investment account at the end of the 2nd year.
Check Your Answers
A. Record the purchase:
Investment $480,000
Cash $480,000
Recognize the company owns 40%, which is significant influence, and use the equity method. The equity method ignores the FMV of the stock.
B. Transactions for the 1st year:
1) Record the investor’s share of income or loss
Investment $80,000
Investment Income $80,000
($200,000 x 40%)
Income increases equity, therefore, the investment account increases also
2) Record the investor’s share of the dividend received
$1.50 per share x 40,000 shares = $60,000
Cash $60,000
Investment $60,000
Paying a dividend decreases equity, therefore, the investment account decreases also
C. Transactions for the 2nd year:
1) Record the investor’s share of their income or loss
Investment expense $50,000
Investment $50,000
$125,000 x 40% = $50,000
Loss x % owned
The loss decreases equity, therefore, the investment account decreases also
2) Record the investor’s share of the dividend received
$1.50 per share x 40,000 shares = $60,000
Cash $60,000
Investment $60,000
Paying a dividend decreases equity, therefore, the investment account decreases also
D. To determine the balance in the investment account, add all the debits and subtract the credits you made to the investment account.
Beginning Cost $480,000
1st year income $ 80,000
1st year dividend ($ 60,000)
2nd year loss ($50,000)
2nd year dividend ($60,000)
Ending Balance $390,000
The ending balance is the amount reported on the balance sheet