Presented below are two independent situations. Situation 1 Hatcher Cosmetics ac

Question

Presented below are two independent situations.

Situation 1
Hatcher Cosmetics acquired 10% of the 216,000 shares of common stock of Ramirez Fashion at a total cost of $16 per share on March 18, 2012. On June 30, Ramirez declared and paid a $84,800 cash dividend. On December 31, Ramirez reported net income of $127,800 for the year. At December 31, the market price of Ramirez Fashion was $18 per share. The securities are classified as available-for-sale.

Situation 2
Holmes, Inc. obtained significant influence over Nadal Corporation by buying 26% of Nadal Exercise 17-12 Presented below are two independent situations. Hatcher Cosmetics acquired 10% of the 216,000 shares of common stock of Ramirez Fashion at a total cost of $16 per share on March 18, 2012. On June 30, Ramirez declared and paid a $84,800 cash dividend. On December 31, Ramirez reported net income of $127,800 for the year. At December 31, the market price of Ramirez Fashion was $18 per share. The securities are classified as available-for-sale. Holmes, Inc. obtained significant influence over Nadal Corporation by buying 26% of Nadal's 31,400 outstanding shares of common stock at a total cost of $11 per share on January 1, 2012. On June 15, Nadal declared and paid a cash dividend of $36,900. On December 31, Nadal reported a net income of $93,800 for the year. Prepare all necessary journal entries in 2012 for both situations. (Credit account titles are automatically indented when amount is entered. Do not indent manually.)

Explanation / Answer

Situation 1 Date Description/Account Debit Credit 3/18/2012 Available-for-Sale Securities         345,600 Calculation: 216,000 shares x $16 per share x 10% interest      Cash         345,600 To record investment in Ramirez Fashion common stocks. 6/30/2012 Cash             8,480 Calculation: $84,800 x 10%      Dividend Revenue             8,480 Explanation: since Hatcher only owns 10% of Ramirez's common stock this investment is recorded in the cost method; share in dividends is considered revenue. Hatcher will not have any share in Ramirez's net income. To record share in dividends. 12/31/2012 Security Fair Value Adjustement (AFS)           43,200 Calculation: (fair value $18 - cost $16) x 21,600 shares = $43,200 gain or increase in value of investment in stocks       Unrealized holding gain or loss - Equity           43,200 To record investment in available-for-sale securities. Situation 2 Date Description/Account Debit Credit 1/1/2012 Investment in Nadal Corp. Stock           89,804 Calculation: 31,400 shares x $11 per share = $345,400 x 26% investment      Cash           89,804 To record 26% investment in Nadal Corporation common stock. 6/15/2012 Cash             9,594 Calculation: $36,900 x 26%      Investment in Nadal Corp. Stock             9,594 Explanation: Holmes acquired 26% of Nadal's stocks and have significant influence; the company will use equity method in accounting for this investment. The share in dividends under the equity method is considered a reduction in the investment account. To record receipt of cash dividends. 12/31/2012 Investment in Nadal Corp. Stock           24,388 Calculation: $93,800 x 26%      Investment Revenue           24,388 Explanation: under the equity method, the share in net income is considered an addition to the investment account. To record share of revenue in investee's net income.

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