Heidebrecht Design acquired 30% of the outstanding common stock of Quayle Compan
ID: 2486569 • Letter: H
Question
Heidebrecht Design acquired 30% of the outstanding common stock of Quayle Company on January 1, 2017, by paying $640,500 for the 42,700 shares. Quayle declared and paid $0.60 per share cash dividends on March 15, June 15, September 15, and December 15, 2017. Quayle reported net income of $400,000 for the year. At December 31, 2017, the market price of Quayle common stock was $27 per share.
Date
Account Titles and Explanation
Debit
Credit
Date
Account Titles and Explanation
Debit
Credit
Cost
Method
Equity
Method
Heidebrecht Design acquired 30% of the outstanding common stock of Quayle Company on January 1, 2017, by paying $640,500 for the 42,700 shares. Quayle declared and paid $0.60 per share cash dividends on March 15, June 15, September 15, and December 15, 2017. Quayle reported net income of $400,000 for the year. At December 31, 2017, the market price of Quayle common stock was $27 per share.
Explanation / Answer
Answer: 1
Dividend revenue = no. of shares * Dividend rate per share
= 42700 shares * $0.60 per share = $25620
Total dividend revenue = 25620*4 = 102480
Fair value gain = (42700 shares * $27 per share ) - 640500
= 1152900 - 640500 = $512400
Journal entries- Cost method:
1- Jan 2017
Investment in Quayle Company Dr. 640500
To cash.............................................640500
Mar. 15, June 15, Sept. 15, Dec. 15 2017 (same entry 4 times)
Cash Dr. 25620
To dividend revenue...........25620
(being dividend received)
31- Dec. 2017
Investment in Quayle Company Dr. 512400
To fair value gain ..................................................512400 (calculated above)
(being gain on measuring investment at market value)
Journal entries - Equity method:
Revenue from investment = Net income * share of ownership
= 400000*30% = 120000
Journal entries:
1- Jan 2017
Investment in Quayle Company Dr. 640500
To cash.............................................640500
Mar. 15, June 15, Sept. 15, Dec. 15 2017 (same entry 4 times)
Cash Dr. 25620
To Investment in Quayle Company ...........25620
(being dividend received)
Investment in Quayle Company Dr. 120000
To share of result in associate company.................120000 (calculated above)
Indicating the balance sheet and income statement account balances at December 31, 2017, under each method of accounting:
Cost method:
Investment in Quayle Company(640500+512400) ............1152900 (balance sheet)
Fair value gain on investment .........................................512400 (income statement)
Dividend revenue............................................................25620 (income statement)
Equity method:
Investment in Quayle Company[640500+120000 - (25620*4)]............658020 (balance sheet)
share of result in associate company...............................................120000 (income statement)
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