On 1/1/20x1, Living Technologies Company purchased an investment in the voting common stock of Home Solutions, Inc. for $100,000 cash. With its investment, Living Technologies Company did not retain significant influence over the financing and operating policies of Home Solutions. Home Solutions, Inc.’s common stock is held by a small group of related investors and the fair value of that common stock is difficult to determine. But, based on the number of Home Solutions common shares outstanding, at 1/1/20x1, Living Technologies’ investment represents 10% of Home Solutions outstanding common shares. On 1/1/20x3, Living Technologies Company purchased an additional 15% of Home Solutions, Inc.’s outstanding voting common stock. The cost of their additional investment is $150,000, which they paid with cash. Amounts paid in excess of the book value of net assets represents an increase in value of machinery and equipment with a remaining useful life of 5 years. With this additional investment, Living Technologies can exercise significant influence over the financing and operating policies of Home Solutions but does not retain a controlling financial interest, as defined in the accounting rules. Relevant financial information for Home Solutions, Inc. is as follows: Additional Information Fiscal Year-ending 12/31/20x1 12/31/20x2 12/31/20x3 Net income $35,000 $45,000 $55,000 Dividends declared and paid $5,000 $6,500 $8,500 Book value of Home Solutions net assets $880,000 $918,500 $965,000 Required: Prepare the journal entry to record Living Technologies investment in Home Solutions at 1/1/20x1. 1/1/20X1 Investment in Home Solutions 100,000 Cash 100,000 For fiscal year 20x1 and 20x2, prepare the journal entry (or entries) for Living Technologies share of dividends and income, as applicable. (dividends 21,22 5,000*10%; 6,500*10%) ‘21 investment- (100,000 - (880,000*10%))*10% = 1,200 or ‘21 investment is 35,000*10% = 3,500 ** go back ‘22 investment Net income * 10% = 4,500 12/31/20x1 Cash 500 Dividend Income 500 Cash 1,200** Investment Income 1,200** 12/31/20x2 Cash 650 Dividend Income 650 Cash 4,500** Investment Income 4,500** Show the change in Living Technologies investment in Home Solutions from 1/1/20x1 to 12/31/20x3, before accounting for the additional investment. Beginning Balance 100,000 Increase In 20X1 1,200 Increase In 20X2 4,500 20x3 105,700 Prepare the journal entry for Living Technologies’ additional investment in Home Solutions at 12/31/20x3. (For this purpose, assume that the fair value of their initial investment was equal to the price paid to acquire that investment) 1/1/20X3 Additional 15% Investment 150,000 Cash 150,000 For fiscal year 20x3, prepare journal entries for Living Technologies share of dividends and income, as applicable. 12/31/20x3 Cash 2,125 Dividend Income 2,125 Cash 1,200** Investment Income 1,200**
the bold is my own work which i am not 100% on. i feel as if the investment account entries are wrong and that when i have to do the dividend income entry for the third year (25% investment) it should be different. Please help.
On 1/1/20x1, Living Technologies Company purchased an investment in the voting common stock of Home Solutions, Inc. for $100,000 cash. With its investment, Living Technologies Company did not retain significant influence over the financing and operating policies of Home Solutions.
Home Solutions, Inc.’s common stock is held by a small group of related investors and the fair value of that common stock is difficult to determine. But, based on the number of Home Solutions common shares outstanding, at 1/1/20x1, Living Technologies’ investment represents 10% of Home Solutions outstanding common shares.
On 1/1/20x3, Living Technologies Company purchased an additional 15% of Home Solutions, Inc.’s outstanding voting common stock. The cost of their additional investment is $150,000, which they paid with cash. Amounts paid in excess of the book value of net assets represents an increase in value of machinery and equipment with a remaining useful life of 5 years.
With this additional investment, Living Technologies can exercise significant influence over the financing and operating policies of Home Solutions but does not retain a controlling financial interest, as defined in the accounting rules.
Relevant financial information for Home Solutions, Inc. is as follows:
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Additional Information |
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|
Fiscal Year-ending |
||
|
|
12/31/20x1 |
12/31/20x2 |
12/31/20x3 |
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Net income |
$35,000 |
$45,000 |
$55,000 |
|
Dividends declared and paid |
$5,000 |
$6,500 |
$8,500 |
|
Book value of Home Solutions net assets |
$880,000 |
$918,500 |
$965,000 |
Required:
- Prepare the
journal entry to record Living Technologies investment in Home Solutions at 1/1/20x1.
1/1/20X1 Investment in Home Solutions 100,000
Cash 100,000
- For fiscal year 20x1 and 20x2, prepare the journal entry (or entries) for Living Technologies share of dividends and income, as applicable. (dividends 21,22 5,000*10%; 6,500*10%)
‘21 investment- (100,000 - (880,000*10%))*10% = 1,200
or ‘21 investment is 35,000*10% = 3,500 ** go back
‘22 investment Net income * 10% = 4,500
12/31/20x1 Cash 500
Dividend Income 500
Cash 1,200**
Investment Income 1,200**
12/31/20x2 Cash 650
Dividend Income 650
Cash 4,500**
Investment Income 4,500**
- Show the change in Living Technologies investment in Home Solutions from 1/1/20x1 to 12/31/20x3, before accounting for the additional investment.
Beginning Balance 100,000
Increase In 20X1 1,200
Increase In 20X2 4,500
20x3 105,700
- Prepare the journal entry for Living Technologies’ additional investment in Home Solutions at 12/31/20x3. (For this purpose, assume that the fair value of their initial investment was equal to the price paid to acquire that investment)
1/1/20X3 Additional 15% Investment 150,000
Cash 150,000
- For fiscal year 20x3, prepare journal entries for Living Technologies share of dividends and income, as applicable.
12/31/20x3 Cash 2,125
Dividend Income 2,125
Cash 1,200**
Investment Income 1,200**
Trading securities:
When securities are purchased with an objective to make profit by trading them in the market, such investments are called as trading securities. The securities are recorded at cost or fair market value and any changes in investment would be routed to unrealized gain / (loss) in investment. These are reported at fair value on the balance sheet.
Available for sale investments:
When an entity purchases equity of other entity with a purpose to resale it in near future, the same are classified as available for sale securities. The change in value should be reported as unrealized gain/(loss) on investment. These are reported at fair value on the balance sheet.
Held till maturity:
When an equity investment is made to keep it for perpetuity and not to sell in near future, such investment can be classified as held till maturity.
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