The following information applies to the questions displayed below. Selk Steel C
ID: 2427912 • Letter: T
Question
The following information applies to the questions displayed below. Selk Steel Co., which began operations on January 4, 2013, had the following subsequent transactions and events in its long-term investments. 2013 Jan. 5 Selk purchased 50,000 shares (25% of total) of Kildare's common stock for $1,100,000. Oct. 23 Kildaire declared and paid a cash dividend of $6.00 per share. Dec. 31 Kildaire's net income for 2013 is $1,334,000, and the fair value of its stock at December 31 is $31.70 per share. 2014 Oct. 15 Kildaire declared and paid a cash dividend of $3.80 per share. Dec. 31 Kildaire's net income for 2014 is $1,646,000, and the fair value of its stock at December 31 is $33.70 per share. 2015 Jan. 2 Selk sold all of its investment in Kildaire for $1,525,000 cash.Explanation / Answer
The journal entry for purchase of 50,000 shares of Kildaire at $1,100,000 is as under:
5th Jan 2013 Investment $1,100,000
Cash Account $1,100,000
(Being 50,000 shares of Kildaire purchased at $22 each)
23rd Oct. 2013 Cash Account $300,000
Dividend Received $300,000
(Being dividend received at the rate of $6 per share)
31st Dec. 2013 No journal entry will be passed for net income of Kildaire as the Selk Steel company does not have control on the Kildaire (control is treated when the holding is more than 50%). The selk stell company has purchased shares as long term investment therefore there will not be any entry for portion of net income of Kildaire company and the fair value adjustment entry.
15th Oct. 2014 Cash Account $190,000
Dividend Received $190,000
(Being dividend received at the rate of $3.80 per share)
31st Dec. 2014 No journal entry will be passed for net income of Kildaire as the Selk Steel company does not have control on the Kildaire (control is treated when the holding is more than 50%). The selk stell company has purchased shares as long term investment therefore there will not be any entry for portion of net income of Kildaire company and the fair value adjustment entry.
The journal entry for sale of investment held for maturity is as under:
2nd Jan. 2016 Cash Account $1,525,000
Profit on sale of investment $425,000
Investment $1,100,000
(Being investment sold)
Part 2: If the company has classified the shares purchased of Kildaire company as available for sale securities then the entries would be as under:
The journal entry for purchase of 50,000 shares of Kildaire at $1,100,000 is as under:
5th Jan 2013 Available for sale Securities $1,100,000
Cash Account $1,100,000
(Being 50,000 shares of Kildaire purchased at $22 each)
23rd Oct. 2013 Cash Account $300,000
Dividend Received $300,000
(Being dividend received at the rate of $6 per share)
31st Dec. 2013 the securities are recorded at fair value at the balance sheet date and the unrealized gain or loss will be recorded as under. The fair value at the balance sheet date is $31.70 per share. The share has bought at the rate of $22 per share therefore the unrealized gain of $9.70 ($31.70-$22) per unit will be recorded at the balance sheet date.
Total unrealized gains or losses =50,000*$9.70=$485,000
31st Dec. 2013 Available for sale securities Account $485,000
Unrealized gains on available for sales securities Account $485,000
(Being unrealized gain recorded as the fair value increased by $9.70 per share of 50,000 shares of Kildaire)
15th Oct. 2014 Cash Account $190,000
Dividend Received $190,000
(Being dividend received at the rate of $3.80 per share)
31st Dec. 2014 the securities are recorded at fair value at the balance sheet date and the unrealized gain or loss will be recorded as under. The fair value at the balance sheet date is $33.70 per share. The share has been recorded as $31.70 on the balance sheet date 31st Dec. 2013. The unrealized gain of $2.00 ($33.70-$31.70) per unit will be recorded at the balance sheet date.
Total unrealized gains or losses =50,000*$2=$100,000
31st Dec. 2013 Available for sale securities Account $100,000
Unrealized gains on available for sales securities Account $100,000
(Being unrealized gain recorded as the fair value increased by $2 per share of 50,000 shares of Kildaire)
The journal entry for sale of available for sale securities is as under:
2nd Jan. 2016 Cash Account $1,525,000
Unrealized gains on available for sales
securities Account $585,000
Available for sale securities Account $1,685,000
Realized gain on sale of securities $425,000
(Being available for sale securities sold)
Investment cost per share as on 1st Jan. 2015 is $22 per share computed as under:
$1,100,000/50,000 shares =$22 per share.
the net increase and decrease in Selk's equity from 5th Jan. 2013 to 2nd Jan. 2015 is as under:
The Selk Equity as on 5th Jan. 2013 is $1,100,000
Increase in fair value by $9.70 on 31st Dec. 2013 $ 485,000
The value of equity as on 31st Dec. 2013 $1,585,000
Increase in fair value by $2 on 31st Dec. 2014 $ 100,000
The value of equity as on 31st Dec. 2014 $1,685,000
The value of equity as on 2nd jan. 2015 $1,685,000
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