Q12E_1.
Question
Accounting for equity investments
Strategic Investments completed the following investment transactions during 2018:
Jan. 14 Purchased 800 shares of Phyflexon stock, paying \(50 per share. The investment represents 4% ownership in Phyflexon’s voting stock. Strategic does not have significant influence over Phyflexon. Strategic intends to hold the investment for the indefinite future.
Aug. 22 Received a cash dividend of \)0.24 per share on the Phyflexon stock.
Dec. 31 Adjusted the investment to its current market value of \(45 per share.
31 Phyflexon reported net income of \)330,000 for the year ended 2018.
Requirements
1. Journalize Strategic’s investment transactions. Explanations are not required.
Step-by-Step Solution
VerifiedBoth sides of the journal totals $44,192.
The method used for reporting the investment made in another company which is less than 20% of the total voting stock of the investee is known as the cost method.
Date | Accounts and Explanation | Debit $ | Credit $ |
14 Jan 2018 | Equity investment | $40,000 |
|
| Cash |
| $40,000 |
|
|
|
|
22 Aug 2018 | Cash | $192 |
|
| Dividend revenue |
| $192 |
|
|
|
|
31 Dec 2018 | Unrealized holding loss | $4,000 |
|
| Fair value adjustment |
| $4,000 |
|
|
|
|
31 Dec 2018 | No Journal entry is made for undistributed net income |
|
|
|
| $44,192 | $44,192 |