5, (15 points) Fortran Inc. purchased 100,000 shares, representing more than 20%

Question

5, (15 points) Fortran Inc. purchased 100,000 shares, representing more than 20%, of Cobol Company on January 1, 2016. On July 1, 2016, Cobol paid dividends. 25% was purchased, cost was $5,250,000, total Dividends paid was $1,000,000 and Net Income is $4,000,00oThe market price of Cobol's stock at 12/31/16 was $60 per share. a. b. c. d. What method of accounting should Fortran Inc. use to account for the investment in Cobol. Prepare the journal entry for the receipt of dividends for Fortran on July 1, 2016 Prepare the necessary journal entry (s) for Fortran as of December 31, 2016. What is the value of the investment in Cobol on Fortran's balance sheet at December 31, 2016, if Fortran did not elect the fair value option? What is the value of the investment in Cobol on Fortran's balance sheet at December 31, 2016, if Fortran elected the fair value option? Prepare the necessary journal entry. e.

Explanation / Answer

Part (a):

Since, the total proportion of investment in Cobol Company is 20% thus, Fortran Inc. should use fair value method to account for the investments in Cobol. In case the total investment would have been higher than 50% of the share capital of Cobol Company then use of fair value method would have mandatory however, even if the investment is less than that the organization are encouraged to use fair value option to account for investment in different companies.    

Part (b):

Date

Account titles and explanations

Debit ($)

Credit ($)

01-07-16

Bank (1000000 x 20%)

200000

Dividend

200000

(Being dividend received)

01-07-16

Dividend

200000

Profit and loss account

200000

(Being dividend received credited to profit and loss account)

Note: It has been assumed that the 25% additional share capital purchased by Fortran has been made pose the declaration and payment f dividend by Cobol.

Part (c):

Date

Account titles and explanations

Debit ($)

Credit ($)

31-12-16

Investment

750000

Profit and loss account

750000

(Being investment value appreciation recorded)

Workings:

Cost of investment

5250000

Number of shares

100000

Market price as on 31/12/2016

60 per share

Market value of investment (100000 x 60)

6000000

Less: Cost of investment

5250000

Profit on investment

750000

Part (d):

In case the firm would not use fair value option then the value of the investment is $5,250,000, i.e. the cost of investment.

Part (e):

Date

Account titles and explanations

Debit ($)

Credit ($)

31-12-16

Investment

750000

Profit and loss account

750000

(Being investment value appreciation recorded)

The value of investment of the company as on 31/12/2016 is $6,000,000.

Date

Account titles and explanations

Debit ($)

Credit ($)

01-07-16

Bank (1000000 x 20%)

200000

Dividend

200000

(Being dividend received)

01-07-16

Dividend

200000

Profit and loss account

200000

(Being dividend received credited to profit and loss account)

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