Problem 75 LO 2 3 4 Analysis of block acquisitions sale of i

Problem 7-5 (LO 2, 3, 4) Analysis of block acquisitions, sale of interest, preferred stock. The information shown on page 425 is available regarding the investments of Billings Corporation in Channel Company for the years 2011–2015

Date Transaction 10% 60 50 20 10 $25,000 30,000 140,000 60,000 (35,000) January 1, 2012 January 1,2013 Purchased common The stockholders\' equity section of Channel Company\'s balance sheet has not changed since the January 1, 2010, original sale of retained earnings account. The stock to the public, except for the balance in the equity as of January 1, 2013, is as follows: 6% Cumulative preferred stock($50 par, liquidation value equals par value). . . . . . $ 50,000 100,000 20,000 103,000 Retained earnings Other relevant facts are as follows: a. On January 1, 20, Channel has a $60,000 retained earnings balance and there are no dividends in b. Any excess of cost over book value on the investment in common stock is viewed as arrears on the on January 1,201 c. The 10% interest sold on January 1, 2016, is the interest p d. Channel Company income and dividends are as follows for 2011-2015: Net $25,000 30,000 30,000 25,000 20,000 $3,000 3,000 3,000 None None None $6,000 5,000 None None Billings\'s investment account balances for its interests in Channel Company are calculated as follows on December 31, 2015: Investment in preferred stock: Original cost.... 30,000 1, 800 Plus dividends in arrears for 2014... Investment in common stock January 1, 2013, purchase 2013Channel income ($30,000×60%) 2013 Channel dividends ($5,000 x 60%) 140,000 18,000 3,000) 15,000 60,000 16,000 January 1, 2015 purchase 2015Channel income ($20,000×80%) Balance, December 31, 2015 $236,000 Assume the investment accounts are to be properly maintained under the simple eity method. Prepare all necessary correcting entries on the books of Billings Corporation as of

Solution

Working Notes

1. Retained Earnings = 2 x (3000 x 60%) = $ 3600

2.  Retained Earnings = 3000 x 80% = $ 2400

3. Adjustment for sales

S.no	Particulars	Debit $	Credit $
1.	Retained Earnings	3600
	Investment A/c		3600
	(To record investment)
2.	Retained Earnings	2400
	Investment A/c		2400
	(To record investment)
3.	Investment A/c	900
	Paid in Capital in excess of par		900
	(To record paid in capital in excess of par)
4.	Gain on sale of Investment	400
	Investment A/c		400
	(To record gain on sale of investment)