. Ordello Company buys 20 percent of the capital stock of Pottsboro Corporation

Question

. Ordello Company buys 20 percent of the capital stock of Pottsboro Corporation on January 1, Year One, for $370,000. Ordello plans to hold these shares for an indefinite period of time. Pottsboro reports net income of $80,000 in Year One and $100,000 in Year Two. The company pays a total cash dividend of $30,000 in each year. Ordello’s investment is worth $420,000 at the end of Year One and $470,000 at the end of Year Two. Ordello sells this investment on the first day of Year Three for $470,000 in cash. a. Assume that the ownership of these shares does not give Ordello the ability to apply significant influence over Pottsboro. Make all journal entries for Ordello for Years One, Two, and Three. b. Assume that the ownership of these shares does give Ordello the ability to apply significant influence over Pottsboro. Make all journal entries for Ordello for Years One, Two, and Three.

Explanation / Answer

(a)ownership of these shares does not give Ordello the ability to apply significant influence over Pottsboro fair value method is used used date Accounting titles & Explanation Debit Credit year 01 Journal for making Investment Jan-01 Investment in Pottsboro Corporation(Available for sale) 370000                    To cash A/c 370000 (Being Investment made has been recorded) For net income No entry cash Dividend 31-Dec Cash A/c 30000        To Dividend revenue A/c 30000 (Being devidend received has been recorded) Unrealised Holding gain or Loss (420,000-370000) 50000             To Securities fair value adjustment A/c 5000 (being fair value adjustmetn has been recorded) Year 02 Journal For net income No entry cash Dividend 31-Dec Cash A/c 30000        To Dividend revenue A/c 30000 (Being devidend received has been recorded) Unrealised Holding gain or Loss (470,000-420000) 50000             To Securities fair value adjustment A/c 5000 (being fair value adjustmetn has been recorded) year 03 Journals for Sale at $470,000 Cash A/c 470000           To Investment in Pottsboro Corporation(Available for sale) 370000            To Realised gain on sale of investments 100000 (being sale of investment has been recorded) b. Assume that the ownership of these shares does give Ordello the ability to apply significant influence over Pottsboro Equity method is used date Accounting titles & Explanation Debit Credit year 01 Journal for making Investment Jan-01 Investment in Pottsboro Corporation A/c 370000                    To cash A/c 370000 (Being Investment made has been recorded) For net income Dec-31 Investment in Pottsboro Corporation A/c ($80,000*20%) 16000             To revenue from Investment A/c 16000 (being share of net income has beeen recorded) For Dividend received Dec-31 cash A/c 30000            To Investment in Pottsboro Corporation A/c 30000 (being Dividend received has been recorded) For fair valie Adjustment No entry Year 2 Journals For net income Dec-31 Investment in Pottsboro Corporation A/c ($100,000*20%) 20000             To revenue from Investment A/c 20000 (being share of net income has beeen recorded) For Dividend received Dec-31 cash A/c 30000            To Investment in Pottsboro Corporation A/c 30000 (being Dividend received has been recorded) For fair valie Adjustment No entry Year 3 Journals Jan-01 Cash A/c 470000            To Investment in Pottsboro Corporation A/c (370,000+16000-30000+20000-30000) 346000             To gain on sale of investment A/c 124000 (Being sale of Invesmtnet has been recorded)

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