Chapter 15, Problem 4BPSB

Problem 15−4B

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

P3 P4

Brinkley Company, which began operations on January 3, 2017, had the following transactions and events in its long- term investments.

2017

Jan. 5 Brinkley purchased 20,000 shares (25% of total) of Bloch’s common stock for $200,500.

Aug. 1 Bloch declared and paid a cash dividend of $1.05 per share.

Dec. 31 Bloch’s net income for 2017 is $82,000, and the fair value of its stock is $11.90 per share.

2018

Aug. 1 Bloch declared and paid a cash dividend of $1.35 per share.

Dec. 31 Bloch’s net income for 2018 is $78,000, and the fair value of its stock is $13.65 per share.

2019

Jan. 8 Brinkley sold all of its investment in Bloch for $375,000 cash.

Part 1

Assume that Brinkley has a signi?cant in?uence over Bloch with its 25% share.

Required

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

2. Compute the carrying (book) value per share of Brinkley’s investment in Bloch common stock as reflected in the investment account on January 7, 2019.

3. Compute the net increase or decrease in Brinkley’s equity from January 5, 2017, through January 8, 2019, resulting from its investment in Bloch.

Check {2} Carrying value per share, $9.63

Part 2

Assume that although Brinkley owns 25% of Bloch’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 these transactions and events for Brinkley. Also prepare an entry dated January 8, 2019, to remove any balance related to the fair value adjustment.

2. Compute the cost per share of Brinkley’s investment in Bloch common stock as re?ected in the investment account on January 7, 2019.

3. Compute the net increase or decrease in Brinkley’s equity from January 5, 2017, through January 8, 2019, resulting from its investment in Bloch.

(1) 1/8/2019 Dr. Unrealized Gain-Equity, $72,500

(3) Net increase $222,500