On January 2, 2018, Sanborn Tobacco Inc. bought 5% of Jackson Industry’s capital

Question

On January 2, 2018, Sanborn Tobacco Inc. bought 5% of Jackson Industry’s capital stock for $103 million. Jackson Industry’s net income for the year ended December 31, 2018, was $133 million. The fair value of the shares held by Sanborn was $124 million at December 31, 2018. During 2018, Jackson declared a dividend of $66 million.

Required:

1. Prepare all appropriate journal entries related to the investment during 2018.

2. Assume that Sanborn sold the stock on January 2, 2019 for $136 million. Prepare the journal entries Sanborn would use to record the sale.

Explanation / Answer

Solution:-

1. January 2, 2018

Investment in Jackson Industry A/c Dr $103 mn

To Bank A/c $103 mn

(Being Investment made)

>>For Dividend:-

Bank A/c Dr $3.30 Mn (66mn*5%)

To Dividend Income A/c $3.30 Mn

(Being Dividend Received)

Dividend Income A/c Dr $3.30 Mn

To Profit and Loss A/c $3.30 Mn

(Being Dividend Income Transferred to Profit and Loss A/c)

2. When Stock Sold on January 2,2019:-

Bank A/c Dr $136 Mn

To Investment in Jackson Industry A/c $103 Mn

To Profit on Sale of Investment A/c $33 Mn

(Being Investment Sold and Profit on Sale of Investment Booked)

Profit in Sale of Investment Sold A/c Dr $33 Mn

To Profit and Loss A/c $33 Mn

(Being Profit on Sale of Investment Sold transferred to Profit and Loss Ac at the year end)

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