On March 31, 2018, Chow Brothers, Inc., bought 10% of KT Manufacturing’s capital
ID: 2539338 • Letter: O
Question
On March 31, 2018, Chow Brothers, Inc., bought 10% of KT Manufacturing’s capital stock for $50 million. KT’s net income for the year ended December 31, 2018, was $80 million. The fair value of the shares held by Chow was $35 million at December 31, 2018. KT did not declare or pay a dividend during 2018.
Required:
1. Prepare all appropriate journal entries related to the investment during 2018.
2. Assume that Chow sold the stock on January 20, 2019 for $30 million. Prepare the journal entries to record the sale.
Explanation / Answer
Journal entries related to the investment in 2018
31-03-2018
Investments in KT Manufacturing a/c Dr. $50mn
to Bank a/c $50mn
(being the purchase of investments)
31-12-2018
Loss on investments in KT Manufacturing a/c Dr. $15 mn
To Investments in KT Manufacturing a/c $15mn
(Being the reduction in the value of investments)
2019
20-01-2019
Bank a/c Dr. $30mn
Loss on investmentsin KT Manufacturing a/c Dr. $5mn
To Investments in KT Manufacturing $35 mn
(Being the sale of investments and loss accounted)
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