Question 12 (30 points) On January 2, 2016, Alpha Company purchased 25,000 share

Question

Question 12 (30 points) On January 2, 2016, Alpha Company purchased 25,000 shares of Bravo Company stock on the open market for $50 per share as a long-term investment. On both June 15 and December 15, Bravo Company paid $50,000 in dividends for a total annual dividend of $100,000. On December 31, Bravo Company reported net income of $400,000 and the stock had a market value of $75 per share. Both Alpha and Bravo operate on a calendar year.

Part A – Assume that at all times during the year there were 250,000 shares of Bravo Company stock outstanding. •Record the journal entries for the purchase of the stock, the dividends, and the reporting of income at year end on Alpha Company books. •State what the year-end value of the stock investment account is on the Alpha Company books.

Part B – Assume that at all times during the year there were 100,000 shares of Bravo Company stock outstanding. •Record the journal entries for the purchase of the stock, the dividends, and the reporting of income at year end on Alpha Company books. •State what the year-end value of the stock investment account is on the Alpha Company books.

Explanation / Answer

1- investment in Shares (Bravo company ) Debit   1250000

credit cash                                                                       1250000

2-june 15 Cash debit            .2*25000 = 5000

              credit dividend income                         5000

december 15   Cash debit            .2*25000 = 5000

              credit dividend income                         5000

4- dividend income   debit                          10000

    credit income summary account                            10000

Year end value of the stock investment account is 25000*50 = 1250000 because investments are kept as long term investment and it would be recoreded at minimum of market price or book value.

B-

1- investment in Shares (Bravo company ) Debit   1250000

credit cash                                                                       1250000

2-june 15 Cash debit            .5*25000 = 12500

              credit dividend income                        12500

december 15   Cash debit            .5*25000 =12500

              credit dividend income                         12500

4- dividend income   debit                          25000

    credit income summary account                            25000

Year end value of the stock investment account is 25000*50 = 1250000 because investments are kept as long term investment and it would be recoreded at minimum of market price or book value.

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