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, 2014. The following transactions relate to securities acquired by Roman Products, Inc., which has a fiscal year ending on December 31:

2014

Jan. 3 Purchased 6,600 shares of Whalen Inc. as an available-for-sale security at $42 per share, including the brokerage commission.

July 8 Received a cash dividend of $0.50 per share on the Whalen stock.

Oct. 19 Sold 3,000 shares of Whalen Inc. stock at $46 per share, less a brokerage commission of $30.

Dec. 12 A cash dividend of $0.50 per share was received on the Whalen stock.

Dec. 31 Whalen Inc. is classified as an available-for-sale investment and is adjusted to a fair value of $40 per share. Use the valuation allowance for available-for-sale investments account in making the adjustment.

2015

Jan. 5 Purchased an influential interest in Tasmania Inc. for $600,000 by purchasing 52,000 shares directly from the estate of the founder of Tasmania Inc. There are 130,000 shares of Tasmania Inc. stock outstanding.

July 9 Received a cash dividend of $0.60 per share on Whalen Inc. stock.

Dec. 8 Received a cash dividend of $0.60 per share plus an extra dividend of $0.10 per share on Whalen Inc. stock.

Dec. 31 Received $18,000 of cash dividends on Tasmania Inc. stock. Tasmania Inc. reported net income of $74,000 in 2015. 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 $46 per share. Use the valuation allowance for available-for-sale investments account in making the adjustment for the change in fair value from $40 to $46 per share.

Required:

1. Journalize the entries to record the preceding transactions. For a compound transaction, if an amount box does not require an entry, leave it blank.

Explanation / Answer

You have two different types of investments. The first one uses the fair-value (cost) method, the other uses the equity method.

2014
Jan. 3 Purchased 6,600 shares of Whalen Inc. as an available-for-sale investment at $42 per share,
including the brokerage commission.
Dr Whalen Inc. Investment 277,200
Cr Cash 277,200

July 8 . The regular cash dividend of $0.45 per share
was received on the stock after the stock split.
6,600 x $0.50 = $3,300dividend
Dr Cash3,3300
Cr Dividend Revenue 3,300

Oct. 19 Sold 3,000 shares of Whalen Inc. stock at $46 per share, less a brokerage commission of $30.
277,200 / 6,600 x 3000 = $126,000 cost of shares sold
(3,000 x 46) - 30 = $137,790cash received
Dr Cash 137,790
Cr Whalen Inc. Investment 126,000
Cr Gain on Sale of Investment 11,970
*There are now 3,600 shares in the investment account

Dec. 12 Received the regular cash dividend of $0.50per share.
3,600 x $0.50 = $1,800dividend
Dr Cash 1,800
Cr Dividend Revenue 1,800

Dec. 31 Whalen Inc. is classified as an available-for-sale investment and is adjusted to a fair value of $40 per share.
Use the valuation allowance for available-for-sale investments account in making the adjustment.
(277,200 - 126,000) /3,600 = $42.00 per share value before adjustment
(42 - 40) x 3,600 = $7,200 decrease in value
Dr Unrealized Holding Gain or Loss 7,200
Cr Valuation Allowance for Available-for-Sale Investment 7,200

2015

Jan. 5 Purchased an influential interest in Tasmania Inc. for $600,000 by purchasing 52,000 shares directly from the estate of the founder of Tasmania Inc. There are 130,000 shares of Tasmania Inc. stock outstanding.
Dr Investment in Tasmania Inc.600,000
Cr Cash 600,000

July 9 Received the regular cash divided of $0.60 per share on Whalen Inc. stock.
3,600x $0.60 = 5,335 dividend
Dr Cash 2,160
Cr Dividend Revenue 2,160

Dec. 8 Received the regular cash dividend of $0.60 per share plus an extra dividend of $0.10 per share on Whalen Inc. stock.
3,600x $0.70 = $2,520dividend
Dr Cash 2,520
Cr Dividend Revenue 2,520

Dec. 31 Received $18,000 of cash dividends on Tasmania Inc. stock. Roman Products uses the equity method of accounting for its investment in Tasmania Inc.
Dr Cash 18,000
Cr Investment in Tasmania Inc. 18,000

Tasmania Inc. reported net income of $74,000 in 2015.
52,000 / 130,000 x 74,000 = $29,600 portion of revenue going to Roman
Dr Investment in Tasmania Inc. 29,900
Cr Revenue from Investment 29,600

Dec. 31 Whalen Inc. is classified as an available-for-sale investment and is adjusted to a fair value of $46 per share. Use the valuation allowance for available-for-sale investments account in making the adjustment for the change in fair value from $40 to $146per share.
(46 - 40 x 3,600) = $21,600increase in value
Dr Valuation Allowance for Available-for-Sale Investment 21,600
Cr Unrealized Holding Gain or Loss 21,600

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