Homework SourseA Corporation acquired 20000 of the 100000 outstanding commo
(A) Corporation acquired 20,000 of the 100,000 outstanding common shares of (B) Company on January 1, 2016, for a cash consideration of $200,000. During 2016, (B) Company had net income of $120,000 and paid dividends of $80,000. At the end of 2016, shares of (B) Company were trading for $11 each. During 2017, (B) Company had a loss of $60,000 and paid dividends of $40,000. Income for the first half of the year was $80,000 and the loss in the second half of the year was $140,000. The dividends were paid on June 30. On July 2, 2017, (A) Corporation sold 5,000 shares of (B) Company for a consideration of $12 per share. At the end of 2017, the share price of (B) Company had fallen to $6 per share. The average of market analysts\' forecasts was that the share price could be expected to rise to $8 per share over the next five years. (Assume that the future recoverable value of the shares is assessed to be $8 per share.)
Provide journal entries for (A) Corporation for all transactions relating to its investment in (B) Company for the year 2017 if it accounts for its investment in (B) Company using the equity method.
Solution
July 2, 2017: Journal Entry for sale of investment
Bank A/c---------------------------------------Dr $60,000
To Investment in B Company Ltd $10,000
To Gain on sale of investment in B Company Ltd $50,000
December 31, 2017: Journal entry recognizing the loss on investment as on closing date
The share price of B Company Ltd has fallen from $11 at the end of FY16 to $6 at the end of 2017. Hence, there is a loss of $5 per share and A corporation hold 15,000 shares of B Company Ltd. Total loss would be $75,000
Investment revaluation loss A/c-------------Dr $75,000
To, Investment in B Company Ltd $75,000
