Heidebrecht Design acquired 30% of the outstanding common stock of Quayle Compan

Question

Heidebrecht Design acquired 30% of the outstanding common stock of Quayle Company on January 1, 2017, by paying $610,500 for the 40,700 shares. Quayle declared and paid $0.40 per share cash dividends on March 15, June 15, September 15, and December 15, 2017. Quayle reported net income of $315,000 for the year. At December 31, 2017, the market price of Quayle common stock was $26 per share.

Prepare the journal entries for Heidebrecht Design for 2017 assuming Heidebrecht Design cannot exercise significant influence over Quayle. (Use the cost method and assume that Quayle common stock should be classified as a trading security.)

Prepare the journal entries for Heidebrecht Design for 2017, assuming Heidebrecht Design can exercise significant influence over Quayle. Use the equity method

Indicate the balance sheet and income statement account balances at December 31, 2017, under each method of accounting.

Explanation / Answer

1. Cost method-Trading security

2. Equity method-Significant influence

Date Account Titles and Explanation Debit Credit Jan. 1, 2017 Investment in Quayle Company 610500 Cash 610500 (To record purchase of investment) Mar. 15, 2017 Cash ($0.40 x 40700) 16280 Dividend revenue 16280 (To records dividend received on investment) Jun. 15, 2017 Cash ($0.40 x 40700) 16280 Dividend revenue 16280 (To records dividend received on investment) Sep. 15, 2017 Cash ($0.40 x 40700) 16280 Dividend revenue 16280 (To records dividend received on investment) Dec. 15, 2017 Cash ($0.40 x 40700) 16280 Dividend revenue 16280 (To records dividend received on investment) Dec. 31, 2017 Investment in Quayle Company 447700 Unrealized gain on trading security 447700 [($26 x 40700) - $610500] (To record trading security at fair value)

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