On March 31, 2018, Chow Brothers, Inc., bought 5% of KT Manufacturing’s capital

Question

On March 31, 2018, Chow Brothers, Inc., bought 5% of KT Manufacturing’s capital stock for $55.1 million. KT’s net income for the year ended December 31, 2018, was $81.7 million. The fair value of the shares held by Chow was $38.4 million at December 31, 2018. KT did not declare or pay a dividend during 2018.

Required:
1. Prepare all appropriate journal entries related to the investment during 2018.
2. Assume that Chow sold the stock on January 20, 2019 for $31.7 million. Prepare the journal entries to record the sale.

Explanation / Answer

1) Date Accounts and Explanation Debit Credit Mar-31-2018 Investment in capital stock 55.1 Cash 55.1 ( To record the investment in capital stock) Dec 31 2018 Unrealized holding gain and loss (55.1-38.4) 16.7 Fair value adjustment 16.7 ( To record the adjustment to fair value) 2) Date Accounts and Explanantion Debit Credit jan-20-2019 Unrealized holding gain and loss (23.4-16.70) 6.7 Fair value adjustment 6.7 ( To record the fair value adjustment before sale) jan-20-2019 Cash 31.7 Realized holding gain and loss 23.4 Investment in capital stock 55.1 ( To record the sale of the investment

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