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Module 7: Intercorporate Investments

Module 7: Intercorporate Investments. Company P purchases 30% of the outstanding common stock of Company S on January 2, 2009 for $400,000 cash. During 2009, Company S reported net income of $300,000 to its shareholders, and declared $100,000 dividends to its shareholders. Required:

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Module 7: Intercorporate Investments

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  1. Module 7:Intercorporate Investments

  2. Company P purchases 30% of the outstanding common stock of Company S on January 2, 2009 for $400,000 cash. During 2009, Company S reported net income of $300,000 to its shareholders, and declared $100,000 dividends to its shareholders. Required: Prepare all journal entries necessary (on Company P’s books) to record this investment using the equity method of accounting. Illustration - Equity Method

  3. 1. Acquisition: 2. Dividends declared (100,000 x 30%) 3. Income reported (300,000 x 30%) Journal Entries on P’s Books: L.T. Investment 400,000 Cash 400,000 Div. Receivable 30,000 L.T. Investment 30,000 L. T. Investment 90,000 Income from S 90,000

  4. Prepare the following journal entries for Jackson Company for 2007. Assume there were no other investments prior to the following activities. Feb. 17 - Purchased 500 shares of Medical Company common stock for $20 per share (classified as trading securities): March 31 - Received a $1.20 per share dividend on Medical Company stock: Comprehensive Problem Invest in Medical 10,000 Cash 10,000 Cash 600 Dividend Income 600

  5. April 1 - Purchased 30,000 of the 100,000 outstanding shares of Olde Company common stock at $10 per share. Classification of Investment? June 28 - Received a $1.00 share dividend on the Olde Company stock: Comprehensive Problem Equity investment Invest in Olde 300,000 Cash 300,000 Cash 30,000 Invest. in Olde 30,000

  6. Oct. 1 - Purchased 2,000 of Alpha Company common stock for $15 per share. These shares are classified as available-for-sale. Dec. 31 - Olde Company reported annual earnings of $80,000 to its investors: Comprehensive Problem Invest in Alpha 30,000 Cash 30,000 80,000 x .3 Invest. in Olde 24,000 Income from Olde 24,000

  7. Dec. 31 AJEs - At the end of the year, the following market prices per share were reported: Medical Co. (trading) $25 per share Alpha Co. (AFS) $12 per share Olde Co. (equity) $11 per share AJE for Medical? AJE for Alpha? AJE for Olde? Comprehensive Problem $20 to $25 = $5 gain x 500 shares Invest in Medical 2,500 Unrealized Gain (I/S) 2,500 $15 to $12 = $3 loss x 2,000 shares Unrealized loss (SE) 6,000 Invest. in Alpha 6,000 NO! - equity method - no revaluation

  8. What total effect would the previous transactions have on the income statement for 2007? 3/31 Dividend income + 600 12/31 Income from Olde + 24,000 12/31 Unrealized gain on Med. + 2,500 Total +27,100 What effect would the previous transactions have on other comprehensive income for 2007? 12/31 Unrealized loss on Alpha - 6,000 Comprehensive Problem

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