On January 2, 2016, Alpha Company purchased 25,000 shares of Bravo Company stock

Question

On January 2, 2016, Alpha Company purchased 25,000 shares of Bravo Company stock on the open market for $50 per share as a long-term investment. On both June 15 and December 15, Bravo Company paid $50,000 in dividends for a total annual dividend of $100,000. On December 31, Bravo Company reported net income of $400,000 and the stock had a market value of $75 per share. Both Alpha and Bravo operate on a calendar year. Part A – Assume that at all times during the year there were 250,000 shares of Bravo Company stock outstanding. Record the journal entries for the purchase of the stock, the dividends, and the reporting of income at year end on Alpha Company books. State what the year-end value of the stock investment account is on the Alpha Company books. Part B – Assume that at all times during the year there were 100,000 shares of Bravo Company stock outstanding. Record the journal entries for the purchase of the stock, the dividends, and the reporting of income at year end on Alpha Company books. State what the year-end value of the stock investment account is on the Alpha Company books.

Explanation / Answer

Solution-

It is an investment in only 10% (25,000/250,000) it will be entered as cost method where the only dividend is income.income earned by a company is irrelevant.

4

Case 2-it has 25% of shares so it will be treated with equity method.Income will be treated hence income entry will be passed.

Alpha Company Journal Entries S.No. Date Description Post reference Debit Credit 1 2-Jan Investment in Brave company stock A/c 1,250,000 Cash A/c 1,250,000 (For Recording purchased 25,000 shares @ $50 per share as a long-term investment) 2 15-Jun Cash A/c 5,000 Dividend Income A/c 5,000 (For For dividend i.e. 50,000/250,000*25,000) 3 31-Dec Cash A/c 1,200 Dividend Income A/c 1,200 (For For dividend i.e. 50,000/250,000*25,000)

4

31-Dec Investment in Brave company stock A/c 625,000 Unrealized gain on investment A/c 625,000 (For Recording unrealized gain i.e 25,000*(75-50))

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