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LANIE INC. has 350,000 common shares authorized and 200,000 common shares issued and outstanding at $2...

  • LANIE INC. has 350,000 common shares authorized and 200,000 common shares issued and outstanding at $2 par value.
  • On March 17, 2018, LANIE INC. issued to BLOOM INC. 35,000 shares of LANIE INC. common stock as a long-term investment at $40 per share.
  • BLOOM INC. purchased 30,000 more shares of LANIE INC. stock on June 15, 2019 at $41.50 per share.
  • On December 31, 2018, and December 31, 2019, the market value of the LANIE INC. stock is $42 and $43, respectively.
  • BLOOM INC. sells 1,000 shares of LANIE INC. investment for $45 per share on March 31, 2020.
  • Before any of the above:
    • LANIE INC. has net income of $1,350,000 in 2018 and $849,000 in 2019.
    • BLOOM INC. has net income of $520,000 in 2018 and $476,000 in 2019.

For BLOOM INC. (35 points)

  1. What is the appropriate reporting category for this stock investment and why? Support your answer.
  2. Prepare the necessary journal entries for 2018 and 2019 and 2020.
  3. What is the effect on the balance sheet for 2018 and 2019 and 2020? What is reported on the balance sheet?
  4. What is the effect on the income statement for 2018 and 2019 and 2020? What is reported on the income statement?

For LANIE INC. (15 points)

  1. Prepare the necessary journal entries for 2018 and 2019 and 2020.
  2. What is the effect on the balance sheet for 2018 and 2019 and 2020? What is reported on the balance sheet?
  3. What is the effect on net income for 2018 and 2019 and 2020? What is reported on the income statement?

Use Excel to organize and answer this.

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Homework Answers

Answer #1

This investment will be classified as long term invetsment. And shall be valued at FVTPL (Fair value through profit or loss) as equity investments are valued at FVTPL.

Journal Entry at the time of purchase of investment in the books of Bloom Inc

Investment in ordinary shares of Lanie Inc $1,400,000

To Cash or Bank $1,400,000

(Being invetsment made in ordinary shares of Lanie Inc)

Journal Entry at the time of issue of ordinary shares in the books of Lanie Inc

Cash or Bank $1,400,000

To Share Capital $70,000  

To Share Premium $1,330,000

(Being shares issued to Bloom Inc at premium of $38 per share)

Journal Entry at the time of sale of investment in shares in the books of Bloom Inc

Cash or Bank $45,000

To Investment in ordinary shares of Lanie Inc $40,000

To Statement of Profit or Loss $5,000

(being 1000 shares of investment in shares of Lanie Inc sold for $45 per share)

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