Chapter 15, Problem 4APSA

Problem 15−4A

Accounting for long-term investments in securities; with and without signi?cant in?uence

P3 P4

Selk Steel Co., which began operations on January 4, 2017, had the following subsequent transactions and events in its long-term investments

2017

Jan. 5 Selk purchased 60,000 shares (20% of total) of Kildaire’s common stock for $1,560,000.

Oct. 23 Kildaire declared and paid a cash dividend of $3.20 per share.

Dec. 31 Kildaire’s net income for 2017 is $1,164,000, and the fair value of its stock at December 31 is $30.00 per share.

2018

1. Oct. 15 Kildaire declared and paid a cash dividend of $2.60 per share.

2. Dec. 31 Ki1daire’s net income for 2018 is $1,476,000, and the fair value of its stock at December 31 is $32.00 per share.

2019

Jan. 2 Selk sold all of its investment in Kildaire for $1,894,000 cash

Part 1

Assume that Selk has a signi?cant in?uence over Kildaire with its 20% share of stock.

Required

1. Prepare journal entries to record these transactions and events for Selk.

2. Compute the carrying (book) value per share of Selk’s investment in Kildaire common stock as re?ected in the investment account on January 1, 2019.

3. Compute the net increase or decrease in Selk’s equity from January 5, 2017, through January 2, 2019, resulting from its investment in Kildaire.

Check (2) Carrying value per share $29

Part 2

Assume that although Selk owns 20% of Kildaire’s outstanding stock, circumstances indicate that it does not have a signi?cant in?uence over the investee and that it is classi?ed as an available-for-sale security investment.

Required

1. Prepare journal entries to record the preceding transactions and events for Selk. Also prepare an entry dated January 2, 2019, to remove any balance related to the fair value adjustment.

2. Compute the cost per share of Selk’s investment in Kildaire common stock as re?ected in the investment account on January 1, 2019.

3. Compute the net increase or decrease in Selk’s equity from January 5, 2017, through January 2, 2019, resulting from its investment in Kildaire.

(1) 1/2/2019 Dr. Unrealized Gain-Equity $360,000

(3) Net increase $682,000