6. Bittersweet Grapefruit Juice Corporation acquired a 35% interest in Smart Fru

Question

6. Bittersweet Grapefruit Juice Corporation acquired a 35% interest in Smart Fruits, Inc. for $300,000 on January 1 of the current year. Bittersweet acquired 68,250 of the 195,000 of the voting common shares outstanding. Smart Fruits, Inc. reported net income of $120,000 at the end of the current year and paid dividends of $36,000 during the current year. At the end of the current year, Smart Fruits, Inc stock was selling for $6/share.

       REQUIREMENTS:

Prepare all journal entries to record these transactions assuming that Bittersweet uses the equity method.

Determine the carrying value of the investment at the end of the current year assuming that Bittersweet uses the equity method.

Prepare the journal entries to account for Bittersweet’s investment in Smart Fruits, Inc. assuming that the investment is classified as available for sale. For this assumption, assume that Bittersweet received a cash dividend in the amount of $12,600.

Prepare the journal entries to account for Bittersweet’s investment in Smart Fruits, Inc. assuming that the investment is classified as trading. For this assumption, assume that Bittersweet received a cash dividend in the amount of $12,600.

Explanation / Answer

1 )Investment in smart fruits inc    debit     300,000

      cash                                               credit    300,000.

[being investment made ]

2)Carrying value = Original investment + share in net income -share in dividend

                               = 300,000 + (120,000 *.35 ) - (36000 *.35)

                               = 300000+42000- 12600

                               = 329400

3)Investment in -Available for sale   debit 300,000

cash                                                                    credit 300,000

[being investment made]

b) cash        debit 12600

Income statement /Dividend credit 1 2600

[being dividend received]

c) Investment in available for sale securities   debit     109500                 [(6*68250)-300000]

   Unrealized gain     credi                        109500

4) Investment    debit 300000

cash   credit   300000

b) cash    debit      12600

Dividend earned credit   12600

c) Investment    debit      109500

Gain on held for trading securities /Income statement   credit 109500

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