Selk Steel Co., which began operations on January 4, 2015, had the following subsequent...

Question:

Selk Steel Co., which began operations on January 4, 2015, had the following subsequent transactions and events in its long-term investments.

2015
Jan.5 Selk purchased 50,000 shares (25% of total) of Kildaire's common stock for $1,600,000.
Oct.23 Kildaire declared and paid a cash dividend of $4.50 per share.
Dec.31 Kildaire's net income for 2015 is $1,294,000, and the fair value of its stock at December 31 is $33.50 per share.
2016
Oct.15 Kildaire declared and paid a cash dividend of $3.40 per share.
Dec.31 Kildaire's net income for 2016 is $1,606,000, and the fair value of its stock at December 31 is $35.00 per share.
2017
Jan.2 Selk sold all of its investment in Kildaire for $2,041,000 cash.

Assume that although Selk owns 25% of Kildaire s outstanding stock, circumstances indicate that it does not have a significant influence over the investee and that it is classified as an available-for-sale security investment.

Required:

1. Prepare journal entries to record the preceding transactions and events for Selk. Also prepare an entry dated January 2, 2017, to remove any balance related to the fair value adjustment.

2. Compute the cost per share of Selk s investment in Kildaire common stock as reflected in the investment account on January 1, 2017.

3. Compute the net increase or decrease in Selk s equity from January 5, 2015, through January 2, 2017, resulting from its investment in Kildaire.

Investment:

Investment is the outlay of money in return of a sum of money in form of income or profit. It is oriented for a future plan of returns or profit and entails some risks, depending on the type of investing you have. Each investment has its own valuation on the time of purchase or at balance sheet date and the presentation of unrealized gains or losses.

Answer and Explanation:

Financial Securities, whether an asset or liability is recognized initially at cost. For AFS, the cost of investment is increase by the share in net income, decreases by the dividends received, and adjusted for its Fair Value at each balance sheet date. Any unrealized gain or losses before the sale of investment is presented in Other Comprehensive Income, but once the said investment was sold, it will be now presented in the Income Statement as realized gains or losses.

1. Debit Credit
Jan 5, 2015 Investment in Kildaires 1,600,000
Cash 1,600,000
Oct 23, 2015 Cash 225,000
Investment in Kildaires 225,000
$4.50 x 50,000 shares
Dec 31, 2015 Investment in Kildaires 323,500
Equity Income in AFS Investment 323,500
$1,294,000 x 25%
Investment in Kildaires 75,000
Gains on AFS Investment 75,000
$33.50 x 50,000=$1,675,000 Fair Value - $1,600,000 cost = $75,000 gain
Oct 15, 2016 Cash 170,000
Investment in Kildaires 170,000
$3.40 x 50,000 shares
Investment in Kildaires 401,500
Equity Income in AFS Investment 401,500
$1,606,000 x 25%
Investment in Kildaires 75,000
Gains on AFS Investment 75,000
$35.00 x 50,000=$1,750,000 Fair Value - $1,675,000 cost = $75,000 gain
Jan 2, 2017 Cash 2,041,000
Loss on Sale of AFS Investment 39,000
Investment in Kildaires 2,080,000

2.
AFS Security as of Jan 1, 2017 $2,080,000
Divided by: No. of Shares 50,000
Cost per Share as of Jan 1, 2017 $41.60
3.
2015 Net Increase Acquisition Cost $1,600,000
Dividends - 2015 (225,000.00)
Net Income -25% 323,500.00
Gain on Valuation 75,000.00
2016 Net Increase Dividends - 2016 (170,000.00)
Net Income -25% 401,500.00
Gain on Valuation 75,000.00
AFS Security as of Jan. 2, 2017 $2,080,000


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