Smith, Inc., has the following stockholders%u2019 equity accounts as of January
ID: 2372966 • Letter: S
Question
Smith, Inc., has the following stockholders%u2019 equity accounts as of January 1, 2013:
Preferred stock%u2014$100 par, nonvoting and
nonparticipating, 8 percent cumulative dividend
Haried Company purchases all of Smith%u2019s common stock on January 1, 2013, for $14,040,000. The preferred stock remains in the hands of outside parties. Any excess acquisition-date fair value will be assigned to franchise contracts with a 40-year life.
During 2013, Smith reports earning $450,000 in net income and pays $360,000 in cash dividends. Haried applies the equity method to this investment.
What is the noncontrolling interest%u2019s share of consolidated net income for this period?
$
What is the balance in the Investment in Smith account as of December 31, 2013?
$
What consolidation entries are needed for 2013?
Smith, Inc., has the following stockholders%u2019 equity accounts as of January 1, 2013:
Explanation / Answer
When there is no significant influence, the fair value method of stock valuation is used. Dividends are recorded as revenues.
COMMON STOCK:------- SHARES:------COST:
Trowbridge Co.----------------4,000-------$100,000 = $25 per share
Holly Co. ----------------------- 5,000------ $30,000 = $6 per share
Oriental Motors Co.----------3,000------ $60,000 = $20 per share
July 1 - Received $1 per share semiannual cash dividend on Holly Co. common stock.
Dr Cash 5,000
Cr Dividend Revenue 5,000
Aug. 1 - Received $0.50 per share cash dividend on Trowbridge Co. common stock.
Dr Cash 2,000
Cr Dividend Revenue 2,000
Sept. 1 - Sold 1,500 shares of Holly Co. common stock for cash at $8 per share, less brokerage fees of $300.
(1,500 x 8) - 300 = 11,700 net proceeds from sale
(30,000 / 5,000) x 1,500 = 9,000 cost of shares
Dr Cash 11,700
Cr Available-for-Sale Securities 9,000
Cr Gain on Sale of Stock 2,700
Oct. 1 - Sold 600 shares of Trowbridge Co. common stock for cash at $30 per share, less brokerage fees of $600.
(600 x 30) - 600 = 17,400 net proceeds from sale
(100,000 / 4,000) x 600 = 15,000 cost of shares
Dr Cash 17,400
Cr Available-for-Sale Securities 15,000
Cr Gain on Sale of Stock 2,400
Nov. 1 - Received $1 per share cash dividend on Oriental Motor Co. common stock.
Dr Cash 3,000
Cr Dividend Revenue 3,000
Dec. 15 - Received $0.50 per share cash dividend on Trowbridge Co. common stock.
(4,000 - 600) x 0.50 = 1,700 dividend
Dr Cash 1,700
Cr Dividend Revenue 1,700
Dec. 31 - Received $1 per share semiannual cash dividend on Holly Co. common stock.
(5,000 - 1,500) x 1 = 3,500 dividend
Dr Cash 3,500
Cr Dividend Revenue 3,500
B) Prepare the adjusting entry at December 31, 2013, to show the securities at fair value. The stock should be classified as available-for-sale securities.
At December 31, the fair values per share of the common stocks were: Trowbridge Co. $23. Holly Co. $7, and Oriental Motors Co. $19.
Trowbridge 3,400 x 25 = 85,000 cost; 3,400 x 23 = 78,200 fair value
85,000 - 78,200 = 6,800 unrealized loss
Holly 3,500 x 6 = 21,000 cost; 3,500 x 7 = 24,500 fair value
24,500 - 21,000 = 3,500 unrealized gain
Oriental 60,000 cost; 3,000 x 19 = 57,000 fair value
60,000 - 57,000 = 3,000 unrealized loss
3,500 - 6,800 - 3,000 = -6,300 total unrealized loss
Dr Unrealized Holding Gain or Loss--Equity 6,300
Cr Securities Fair Value Adjustment (Available-for Sale) 6,300
C) Show the balance sheet presentation of the investment-related accounts at December 31, 2013. At this date, Eli Associates has common stock $2,000,000 and retained earnings $1,200,000.
The unrealized loss should be recognized in "Other comprehensive income" as a separate component of stockholders' equity.
Common Stock . . . . . . . . . . . . . .$2,000,000
Retained Earnings . . . . . . . . . . . . .1,200,000
Other Comprehensive Income . . . . . . . (6,300)
Total Stockholders' Equity . . . . . . $3,193,700
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