Question 1

Posthorn Corporation acquired 20,000 of the 100,000 outstanding common shares of Stamp Company on January 1, 2016, for a cash consideration of $200,000. During 2016, Stamp Company had net income of $120,000 and paid dividends of $80,000. At the end of 2016, shares of Stamp Company were trading for $11 each.
During 2017, Stamp Company had a loss of $60,000 and paid dividends of $40,000. Income for the first half of the year was $80,000 and the loss in the second half of the year was $140,000. The dividends were paid on June 30. On July 2, 2017, Posthorn Corporation sold 5,000 shares of Stamp Company for a consideration of $12 per share. At the end of 2017, the share price of Stamp Company had fallen to $6 per share. The average of market analysts' forecasts was that the share price could be expected to rise to $8 per share over the next five years. (Assume that the future recoverable value of the shares is assessed to be $8 per share.)
Required:
Provide journal entries for Posthorn Corporation for all transactions relating to its investment in Stamp Company for the year 2017 if it accounts for its investment in Stamp Company using the equity method.

Accepted Answer

The answer of Posthorn Corporation acquired 20,000 of the 100,000...

Question 2

Telnor Corporation (whose year end is December 31 of each year) has made a series of investments in Pineapple Corp., one of their major customers. The management of Telnor has been impressed by the products produced and sold by Pineapple and their market success. These investments are only going to be held for a short period of time. The market price of Pineapple stock on December 31, 2018 and 2019 was $200 and $250 respectively per share. Dividends of $1.00 per share were declared and paid on December 31 of each year. The following are the purchases and sales that Telnor entered into in 2018 and 2019: $$\begin{array} { | l | l | l | l | } 
\hline \text { Date } & \text { No. Of Shares } & \text { Total } & \text { Cost (per share } \
 \hline \text { March 31, 2018 } & 1,000 & 1,000 & \$ 75 \
\hline \text { June 30, 2018 } & 1,000 & 2,000 & \$ 125 \
\hline \text { September } 30,2018 & 1,000 & 3,000 & \$ 175 \
\hline \text { September } 30,2019 & ( 3,000 ) & 0 & \$ 240 \
\hline
\end{array}$$ Assume that Telnor accounts for its investment in Pineapple Corp. at fair value through profit and loss.
Required:
(a) Prepare the journal entries to record the transactions in 2018 and 2019 with respect to Telnor's investment in Pineapple.
(b) How would Telnor disclose the investment in Pineapple on its balance sheet?
Unrealized gain at December 31, 2018 (3,000 x $200) - $375,000 = $225,000.

Accepted Answer

The answer of Telnor Corporation (whose year end is December...

Question 3

If Posthorn Corporation accounts for its investment in Stamp Company using the equity method, what entry will the company make to record the dividends received from Stamp Company for 2016?

Accepted Answer

The answer of If Posthorn Corporation accounts for its investment...

Question 4

Posthorn Corporation acquired 20,000 of the 100,000 outstanding common shares of Stamp Company on January 1, 2016, for a cash consideration of $200,000. During 2016, Stamp Company had net income of $120,000 and paid dividends of $80,000. At the end of 2016, shares of Stamp Company were trading for $11 each.
During 2017, Stamp Company had a loss of $60,000 and paid dividends of $40,000. Income for the first half of the year was $80,000 and the loss in the second half of the year was $140,000. The dividends were paid on June 30. On July 2, 2017, Posthorn Corporation sold 5,000 shares of Stamp Company for a consideration of $12 per share. At the end of 2017, the share price of Stamp Company had fallen to $6 per share. The average of market analysts' forecasts was that the share price could be expected to rise to $8 per share over the next five years. (Assume that the future recoverable value of the shares is assessed to be $8 per share.)
Required:
Provide journal entries for Posthorn Corporation for all transactions relating to its investment in Stamp Company for the year 2017 if it accounts for its investment in Stamp Company as a fair value through profit and loss investment.

Accepted Answer

The answer of Posthorn Corporation acquired 20,000 of the 100,000...

Question 5

Ronen Corporation owns 35% of the outstanding voting shares of Western Communications Inc. over which it exerts significant influence. The carrying value of its investment as at October 31, 2016 was $3,750,000. Ronen has now designated its investment in Western as FVTPL as a result of the open market purchase of a 51% interest in Western by Overhaul Corp. Western is in financial distress. The market value of Ronen's 35% interest is now $2,000,000.
Required:
(a) What is the accounting result of a change from the equity method of accounting to FVTPL?
(b) Do any journal entries need to be recorded by Ronen as a result of this change? If so, what is the entry?

Accepted Answer

The answer of Ronen Corporation owns 35% of the outstanding...

Question 6

If Posthorn Corporation accounts for its investment in Stamp Company using the equity method, what entry will the company make to record the revaluation of the investment at December 31, 2016?

Accepted Answer

The answer of If Posthorn Corporation accounts for its investment...

Question 7

X purchased 40% of Y on January 1, 2016 for $400,000. Y paid dividends of $50,000 in each year. Y's income statements for 2016 and 2017 showed the following. $$\begin{array} { | l | l | } 
\hline & 2016 \
\hline \text { Income (loss) betore income taxes } &\$100,000 \
\hline \text { Income tax expense (recovery) } &40,000 \
\hline \text { Net income (loss) } & \$60,000 \
\hline \text { Other comprehensive income } &20,000 \
\hline \text { Comprehensive income (loss) } & \$80,000 \
\hline
\end{array}$$ At December 31, 2016, the fair value of the investment was $440,000 and at December 31, 2017, the fair value of the investment was $420,000.
Required:
Prepare X's journal entries for 2016 and 2017, assuming that this is a Portfolio Investment and is accounted for at fair value through profit and loss.

Accepted Answer

The answer of X purchased 40% of Y on January...

Question 8

On January 1, 2017, Joyce Inc. paid $600,000 to purchase 25% of Mark Inc's outstanding voting shares. Joyce has significant influence over Mark. Mark's earnings for 2017 and 2018 were $100,000 and $200,000 respectively. Mark paid dividends in the amount of $20,000 and $10,000 during 2017 and 2018, respectively.
Required:
Calculate the balance in Joyce's Investment account as at December 31, 2018.

Accepted Answer

The answer of On January 1, 2017, Joyce Inc. paid...

Question 9

If Posthorn Corporation accounts for its investment in Stamp Company using the equity method, what will the balance in the Investment in Stamp Company be at December 31, 2016?

Accepted Answer

The equity method of accounting means that Posthorn Corporation will record its share of Stamp Company's net income (or loss) as an increase (or decrease) in the Investment in Stamp Company account. Additionally, any dividends received from Stamp Company will also be recorded as a reduction in the Investment in Stamp Company account.
Given that Posthorn Corporation owns 40% of Stamp Company, we can calculate its share of net income as follows:
Net income of Stamp Company * 40% = Posthorn Corporation's share of net income
Using the data provided in the question stem, we can calculate Posthorn Corporation's Investment in Stamp Company as follows:
Beginning balance: $200,000
Add Posthorn Corporation's share of net income for the year:
$600,000 * 40% = $240,000
Ending balance before dividends: $440,000
Subtract dividends received:
$440,000 - $32,000 = $408,000
Therefore, the balance in the Investment in Stamp Company account at December 31, 2016, using the equity method, would be $408,000, which corresponds to choice B.

Question 10

If Posthorn Corporation accounts for its investment in Stamp Company at fair value through other comprehensive income, what entry will the company make to record the revaluation of the investment at December 31, 2016?

Accepted Answer

The answer of If Posthorn Corporation accounts for its investment...

Question 11

Dragon Corporation acquired a 7% interest in the outstanding shares of Slayer Inc. on January 1, 2016 at a cost of $200,000. Dragon Corporation was a private company and reported in compliance with the Accounting Standards for Private Enterprises (ASPE) and accounted for Slayer Inc., whose shares were not publicly traded, using the cost method. Slayer reported net income and made dividend payments to its shareholders at noted below. On December 31, 2018 Slayer declared bankruptcy as a result of a series of losses as noted. $$\begin{array} { | l | l | l| } 
\hline & \text { Income } & \text { Dividends } \
\hline 2016 & 50,000 & 20,000 \
\hline 2017 & ( 10,000 ) & 20,000 \
\hline 2018 & ( 40,000 ) & 20,000 \
\hline
\end{array}$$ Required:
(a) Prepare the journal entries that Dragon would make in each year.
(b) Prepare the general ledger account for Dragon's investment in Slayer.

Accepted Answer

The answer of Dragon Corporation acquired a 7% interest in...

Question 12

On January 1, 2016, Black Corporation purchased 15 per cent of the outstanding shares of White Corporation for $498,000. From Black's perspective, White was a FVTPL investment. The fair value of Black's investment was $520,000 at December 31, 2016.
On January 1, 2017, Black purchased an additional 30 per cent of White's shares for $1,040,000. The second share purchase allows Black to exert significant influence over White.
During the two years White reported the following results: $\begin{array}{|l|l|l|} 
\hline& \text { Profits } & \text { Dwidends } \
\hline 2016 & 400,000 & 240,000 \
\hline 2017 & 540,000 & 250,000 \
\hline
\end{array}$ Required:
With respect to this investment, prepare Black's journal entries for both 2016 and 2017.

Accepted Answer

The answer of On January 1, 2016, Black Corporation purchased...

Question 13

If Posthorn Corporation accounts for its investment in Stamp Company using the cost method, what entry will the company make to record the revaluation of the investment at December 31, 2016?

Accepted Answer

The answer of If Posthorn Corporation accounts for its investment...

Question 14

Under which standards is it appropriate to record losses in excess of the investor's interest in an associate company because the associate is imminently expected to return to profitability?

Accepted Answer

The answer of Under which standards is it appropriate to...

Question 15

If Posthorn Corporation accounts for its investment in Stamp Company at fair value through other comprehensive income, what will the balance in the Investment in Stamp Company be at December 31, 2016?

Accepted Answer

The answer of If Posthorn Corporation accounts for its investment...

Question 16

X purchased 40% of Y on January 1, 2016 for $400,000. Y paid dividends of $50,000 in each year. Y's income statements for 2016 and 2017 showed the following: $$\begin{array} { | l | l | } 
\hline & 2016 \
\hline \text { Income (loss) betore income taxes } &\$100,000 \
\hline \text { Income tax expense (recovery) } &40,000 \
\hline \text { Net income (loss) } & \$60,000 \
\hline \text { Other comprehensive income } &20,000 \
\hline \text { Comprehensive income (loss) } & \$80,000 \
\hline
\end{array}$$
 At December 31, 2016, the fair value of the investment was $440,000 and at December 31, 2017, the fair value of the investment was $420,000.
Required:
Prepare X's journal entries for 2016 and 2017, assuming that this is a significant influence investment.

Accepted Answer

The answer of X purchased 40% of Y on January...

Question 17

If Posthorn Corporation accounts for its investment in Stamp Company using the cost method, what will the balance in the Investment in Stamp Company be at December 31, 2016?

Accepted Answer

The answer of If Posthorn Corporation accounts for its investment...

Question 18

Telnor Corporation (whose year end is December 31 of each year) has made a series of investments in Pineapple Corp., one of their major customers. The management of Telnor has been impressed by the products produced and sold by Pineapple and their market success. These investments are only going to be held for a short period of time. The market price of Pineapple stock on December 31, 2018 and 2019 was $200 and $250 respectively per share. Dividends of $1.00 per share were declared and paid on December 31 of each year. The following are the purchases and sales that Telnor entered into in 2018 and 2019: $$\begin{array} { | l | l | l | l | } 
\hline \text { Date } & \text { No. Of Shares } & \text { Total } & \text { Cost (per share } \
 \hline \text { March 31, 2018 } & 1,000 & 1,000 & \$ 75 \
\hline \text { June 30, 2018 } & 1,000 & 2,000 & \$ 125 \
\hline \text { September } 30,2018 & 1,000 & 3,000 & \$ 175 \
\hline \text { September } 30,2019 & ( 3,000 ) & 0 & \$ 240 \
\hline
\end{array}$$ Assume that Telnor accounts for its investment in Pineapple Corp. at fair value through other comprehensive income.
Required:
(a) Prepare the journal entries to record the transactions in 2018 and 2019 with respect to Telnor's investment in Pineapple.
(b) How would Telnor disclose the investment in Pineapple on its balance sheet?
Unrealized gain at December 31, 2018 (3,000 * $200) - $375,000 = $225,000

Accepted Answer

The answer of Telnor Corporation (whose year end is December...

Question 19

If Posthorn Corporation accounts for its investment in Stamp Company at fair value through other comprehensive income, what entry will the company make to record the dividends received from Stamp Company for 2016?

Accepted Answer

The answer of If Posthorn Corporation accounts for its investment...

Question 20

If Posthorn Corporation accounts for its investment in Stamp Company using the cost method, what entry will the company make to record the dividends received from Stamp Company for 2016?

Accepted Answer

The answer of If Posthorn Corporation accounts for its investment...

Quiz 2: Investments in Equity Securities

If Posthorn Corporation accounts for its investment in Stamp Company using the equity method, what entry will the company make to record the dividends received from Stamp Company for 2016?

If Posthorn Corporation accounts for its investment in Stamp Company using the equity method, what entry will the company make to record the revaluation of the investment at December 31, 2016?

If Posthorn Corporation accounts for its investment in Stamp Company using the equity method, what will the balance in the Investment in Stamp Company be at December 31, 2016?

If Posthorn Corporation accounts for its investment in Stamp Company at fair value through other comprehensive income, what entry will the company make to record the revaluation of the investment at December 31, 2016?

If Posthorn Corporation accounts for its investment in Stamp Company using the cost method, what entry will the company make to record the revaluation of the investment at December 31, 2016?

Under which standards is it appropriate to record losses in excess of the investor's interest in an associate company because the associate is imminently expected to return to profitability?

If Posthorn Corporation accounts for its investment in Stamp Company at fair value through other comprehensive income, what will the balance in the Investment in Stamp Company be at December 31, 2016?

If Posthorn Corporation accounts for its investment in Stamp Company using the cost method, what will the balance in the Investment in Stamp Company be at December 31, 2016?

If Posthorn Corporation accounts for its investment in Stamp Company at fair value through other comprehensive income, what entry will the company make to record the dividends received from Stamp Company for 2016?

If Posthorn Corporation accounts for its investment in Stamp Company using the cost method, what entry will the company make to record the dividends received from Stamp Company for 2016?