Presented below are two independent situations. (a) Gambino Cosmetics acquired 1

Question

Presented below are two independent situations.

(a) Gambino Cosmetics acquired 10% of the 242,500 shares of common stock of Nevins Fashion at a total cost of $12 per share on March 18, 2017. On June 30, Nevins declared and paid a $52,600 dividend. On December 31, Nevins reported net income of $112,000 for the year. At December 31, the market price of Nevins Fashion was $14 per share. The stock is classified as available-for-sale.
(b) Kanza, Inc., obtained significant influence over Rogan Corporation by buying 40% of Rogan’s 32,100 outstanding shares of common stock at a total cost of $5 per share on January 1, 2017. On June 15, Rogan declared and paid a cash dividend of $35,600. On December 31, Rogan reported a net income of $90,000 for the year.

Prepare all the necessary journal entries for 2017 for (a) Gambino Cosmetics and (b) Kanza, Inc.

Explanation / Answer

(a) Gambino Cosmetics < 20% of the common stock of Nevins Fashion, so the cost method is used.
Mar. 18 2017
Dr stock investments $291,000 (10% x 242,500 shares x $12 per share)
Cr cash $291,000

June 30
Dr Cash $5260(10% x $52,600)
Cr dividend revenue $5260

Dec. 31
Dr stock investments $158,400 ($32,100x $14 each - cost of $291,000)
Cr market adjustment available for sale (within equity) $158,400

(b)Kanza, Inc., bought 40% of Rogan’s, so the equity method is used.
Jan. 1
Dr stock investments $64,200 (40% of $32,100 shares x $5)
Cr Cash $64,200

June 15
Dr cash $14,240 (40% of $35,600)
Cr stock investments $14,240

Dec. 31
Dr stock investments $36,000 (40% of $90,000)
Cr revenue from investments in Parks Corp. $36,000

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