On 1/1/14 Jay Company made 2 investments in equity securities of other companies

Question

On 1/1/14 Jay Company made 2 investments in equity securities of other companies as described below:

Purchased 1000 of the 100,000 shares of ABC Stock at $25 per share. At this time the fair market value of assets equaled book value except for a building with a fair market value of $1,000,000 and a book value of $700,000. The building has 10 years of remaining life

Purchased 400 of the 1000 shares of DEF Stock at $100 per share. At this time the fair market value of assets equaled book value except for a truck with a fair market value of $40,000 and a book value of $22,000. The truck has 5 years of remaining life.

The following events happened in 2014, 2015 and 2016

2014: ABC paid $1 per share dividend, reported income of $500,000 and its stock was selling for $26 per share on 12/31/2014; DEF paid $2 per share dividend, reported income of $75,000 and its stock was selling for $95 on 12/31/2014

2015: ABC paid $2 per share dividend, reported a loss of $200,000 and its stock was selling for $22 per share on 12/31/2015; DEF paid $1 per share dividend, reported a loss of $44,000 and its stock was selling for $101 on 12/31/2015

On 1/4/2016 Jay Company sold ABC Stock at $27 per share. On 1/5/2016 Jay Company sold DEF stock at $98 per share.

          REQUIRED: PREPARE ALL NECESSARY JOURNAL ENTRIES FOR JAY COMPANY IN 2014, 2015 AND 2016.

Explanation / Answer

Reporting Stock Investments of 20-50% of Equity

When the amount of stock purchased is between 20% and 50% of the common stock outstanding, the purchasing company's influence over the acquired company is often significant. The deciding factor, however, is significant influence or the ability for the investor to have a say in business decisions made by company owners. If other factors exist that reduce the influence, or if significant influence is gained at an ownership of less than 20%, the equity method may be appropriate. FASB interpretation 35 (FIN 35) underlines the circumstances where the investor is unable to exercise significant influence).

To account for this type of investment, the purchasing company uses the equity method. Under the equity method, the purchaser records its investment at the original cost. The balance of the investment increases by the pro-rata share of the investee's income and decreases by the pro-rata share of dividends declared by the subsidiary.

As 400 shares are purchased so holding is 400/1000 == 40%

Recognisation of Goodwill is forbedon as per USGAAp & IFRS

So Accounting for DEF investment is as follows

Investment in ABC Stock

2014 1) partuiculars Debit Credit Investment in DEF 40000 To Cash/bank 40000 being investment made in DEF 2) Investment in DEF 30000 To Equity in DEF 30000 ( Income recognined as per equity method of accounting) 3) Dividend receivable 800 To Investment in DEF 800 2015 1) Equity in DEF 17600 To Investment in DEF 17600 ( loss recognined as per equity method of accounting) 2) Dividend receivable 400 To Investment in DEF 400 2016 1) Cash/bank 39200 loss on investment 12000 To Investment in DEF 51200

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