On March 31, 2018, Chow Brothers, Inc., bought 8% of KT Manufacturing’s capital

Question

On March 31, 2018, Chow Brothers, Inc., bought 8% of KT Manufacturing’s capital stock for $53.3 million. KT’s net income for the year ended December 31, 2018, was $81.1 million. The fair value of the shares held by Chow was $37.2 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. Record the purchase of KT capital stock for 53.3 million, Record the entry for KTs net income, Record the fair value adjustment

2. Assume that Chow sold the stock on January 20, 2019 for $31.1 million. Prepare the journal entries to record the sale : Record the entry to adjust the fair value, Record the sale of stock on jan 20, 2019 for 31.1 million

Explanation / Answer

1) Date Accounts and Explanation Debit Credit 31-3-2018 Investment - Capital Stock       53,300,000 cash 53,300,000 ( To record the purcahse of the investment) 31-12-2018 Unrealized holding gain and loss       16,100,000 fair value Adjustment(53.3-37.2) 16,100,000 ( To record the adjustment to fair value) 2) 20-01-2019 unrealized holding gain and loss          6,100,000 fair value Adjustment(22.2-16.1)     6,100,000 ( To record the adjustment to fair value before sale) 20-01-2019 Cash       31,100,000 realized holding gain and loss       22,200,000 Investment - Capital Stock 53,300,000 ( To record the sale of the investment)

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