Q.20PGA_1 - Horngren'S Financial And Managerial Accounting

Question

Question: P10-20A Accounting for equity investments

The beginning balance sheet of Waterfall Source Co. included a \(400,000 investment in Evan stock (20% ownership, Waterfall has significant influence over Evan). During the year, Waterfall Source completed the following investment transactions:

Mar. 3 Purchased 4,000 shares at \)11 per share of Lili Software common stock as a long-term equity investment, representing 7% ownership, no significant influence.

May 15 Received a cash dividend of \(0.61 per share on the Lili investment. 

Dec. 15 Received a cash dividend of \)70,000 from Evan investment. 

        31 Received Evan’s annual report showing \(300,000 of net income. 

        31 Received Lili’s annual report showing \)120,000 of net income for the year. 

        31 Evan’s stock fair value at year-end was \(390,000. 

        31 Lili’s common stock fair value at year-end was \)12 per share.

Requirements 

1. Journalize the transactions for the year of Waterfall Source.

Step-by-Step Solution

Answer

Answer

Both sides of the journal totals $124,440.

Step 1: Definition of Common Stock

Common stock can be defined as the bundle of securities that the company issues to shareholders representing voting rights and ownership in the business. 

Step 2: Journal Entries for Transactions of the Year

Date	Accounts and Explanation	Debit $	Credit $
3 March	Equity investment - Lili	$44,000
	Cash		$44,000
15 May	Cash	$2,440
	Dividend revenue		$2,440
15 Dec	Cash	$14,000
	Equity investment – Evan		$14,000
31 Dec	Equity investment	$60,000
	Revenue from investment – Evan		$60,000
31 Dec	No journal entry was made for net income of equity investment without significant influence.
31 Dec	No Journal entry will be made because the balance is adjusted in entries of net income and dividend.
31 Dec	Fair value adjustment – Lili’s	$4,000
	Unrealized holding gains		$4,000
		$124,440	$124,440