CC 1810 CHS 8 s ns 80 ated bal but not PROBLEM 4 2018, Giant Co. purchased the f

Question

CC 1810 CHS 8 s ns 80 ated bal but not PROBLEM 4 2018, Giant Co. purchased the following investments for cash: Rock Co stock.. On 40,000 shs Boulder Co. stock.. Both Rock and Boulder 240,000 Company have 100,000 total common shares 9. During 2018, Rock and Boulder had the following information: Market Price Cash NET INCOME Dividends/share Per share @ 12/31/2018 $1.40/sh Rock Co. $100,000 $0.20/sh Boulder Co $350,000 S0.50/sh $6.50/sh 1. What type of investment is Rock Co.? What type of investment is Boulder Co.? 2. For the investment in Rock Co., prepare the journal entries necessary for the following transactions on Giant's books (journal paper provided on next page). A. Purchase of the Rock Co. shares on January 1, 2018. B. Dividends received from Rock Co. during 2018. C. Any adjustment for Net Income earned by Rock Co., if necessary, during 2018. D. Any adjustment for year-end market price of Rock Co., if necessary. 3. For the investment in Boulder Co., prepare the journal entries necessary for the following transactions on Giant's books Gournal paper provided on next page). A. Purchase of the Boulder Co. shares on January 1, 2018 B. Dividends received from Boulder Co. during 2018. C. Any adjustment for Net Income earned by Boulder Co., if necessary, during 2018. D. Any adjustment for year-end market price of Boulder Co., if necessary

Explanation / Answer

1. Investment in Rock Co is AFS (Available for sale Securities), because the investment is less than 20% (10000/10000 = 10%)stake on the total outstanding shares of Rock Co. and it is not held for trading.

Investment in Boulder is (40000/100000 = 40%) which is more than 20% but still doesnt have control over the company, still it will have substantial influence over the company. Hence it is influential securities.

2. Journal Entries are as follows:

Seriel no./date Particulars Debit Credit A. Investment in Rock Co. a/c …..dr 15000            To Cash a/c 15000 (To record purchase of shares in Rock Co.) B. Cash a/c …..dr 2000               To Dividends revenue 2000 (To record dividends received from Rock Co. (10000 shs x $0.20)) C. No entry required D. Unrealized loss on available for sale securities   a/c …..dr 1000             To Valuation allowance for available for sale securities 1000 (To record investments at fair value[$15000 - (10000 shs x $1.40)]) 3. Journal Entries are as follows: Seriel no./date Particulars Debit Credit A. Investment in Boulder Co. a/c …..dr 240000 To Cash a/c 240000 (To record purchase of shares in Rock Co.) B. Cash a/c …..dr 20000            To Investment in Boulder Co. 20000 (To record dividends received from Boulder Co.(40000 shs x $0.50)) C. Investment in Boulder Co. a/c …..dr 140000                 To Investment income 140000 (To record share in net income of Boulder Co.($350000 x 40%)) D. No entry required

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