Stock Investment Transactions, Equity Method and Available-for-Sale Securities R

Question

Stock Investment Transactions, Equity Method and Available-for-Sale Securities Roman Products, Inc., is a wholesaler of men's hair products. The company began operations on January 1, 2012. The following transactions relate to securities acquired by Roman Products, Inc., which has a fiscal year ending on December 31: 2012 Jan. 3 Purchased 4,200 shares of Whalen Inc. as an available-for-sale investment at $48 per share, including the brokerage commission. July 8 Whalen Inc. stock was split 3 for one. The regular cash dividend of $0.40 per share was received on the stock after the stock split. Oct. 19 Sold 1,900 shares of Whalen Inc. stock at $19 per share, less a brokerage commission of $38. Dec. 12 Received the regular cash dividend of $0.40 per share. Dec. 31 Whalen Inc. is classified as an available-for-sale investment and is adjusted to a fair value of $13 per share. Use the valuation allowance for available-for-sale investments account in making the adjustment. 2013 Jan. 5 Purchased an influential interest in Tasmania Inc. for $620,000 by purchasing 31,500 shares directly from the estate of the founder of Tasmania Inc. There are 90,000 shares of Tasmania Inc. stock outstanding. July 9 Received the regular cash divided of $0.50 per share on Whalen Inc. stock. Dec. 8 Received the regular cash dividend of $0.50 per share plus an extra dividend of $0.10 per share on Whalen Inc. stock. Dec. 31 Received $19,000 of cash dividends on Tasmania Inc. stock. Tasmania Inc. reported net income of $78,000 in 2013. Roman Products uses the equity method of accounting for its investment in Tasmania Inc. Dec. 31 Whalen Inc. is classified as an available-for-sale investment and is adjusted to a fair value of $19 per share. Use the valuation allowance for available-for-sale investments account in making the adjustment for the change in fair value from $13 to $19 per share.

Explanation / Answer

July 8 Whalen Inc. stock was split 3 for one. The regular cash dividend of $0.55 per share was received on the stock after the stock split. Stock splits do not affect the total cost of the shares, so no formal journal entry is required for the split. However, it does affect the dividend. 3,700 x 3 x 0.55 = 6,105 dividend Dr Cash 6,105 Cr Dividend Revenue 6,105 Oct. 19 Sold 1,700 shares of Whalen Inc. stock at $17 per share, less a brokerage commission of $34 36 / 3 = $12 per share cost of stock.sold 1,700 x 12 = $20,400 total cost of stock sold Dr Cash 28,866 Cr Available-for-Sale Securities 20,400 Cr Gain on Sale 8,466

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