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Question 17

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The next two questions are based on the following information: On 12/31/X1, Pratt Company owned all 100,000 outstanding shares of Seecamp Company and reported its investment at $400,000 when Seecamp's equity consisted of $200,000 of Retained Earnings and $200,000 of Capital Stock. On 1/2/X2, Pratt Company sold 20,000 Seecamp shares to Big Company for $5 per share. Which of the following entries should Pratt Company make to record the sale?

Select one:

a. Debit Cash for $100,000 and Credit Investment for $100,000

b. Debit Cash for $100,000, Credit Investment for $80,000, and Credit Gain for $20,000

c. Debit Cash for $100,000, Credit Investment for $80,000, and Credit OCI Gain for $20,000

d. Debit Cash for $100,000, Credit Investment for $80,000, and Credit Capital: Pratt for $20,000

e. None of the Above

Question 18

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This question is a continuation of the preceding question about Pratt and Seecamp. Assume that on 1/2/X3, Pratt sold 70,000 shares of Seecamp stock in the market for $800,000. Which of the following is a true statement about Pratt's accounting for its Seecamp Investment in year X3 following its sale of shares?

Select one:

a. Pratt Company should continue to account for its Seecamp investment using the Equity Method.

b. Pratt Company must account for its Seecamp Investment using the FV accounting method.

c. Pratt Company can account for its Seecamp Investment using either AFS or the FV accounting method.

d. None of the Above

Answer 1

17. b. Debit Cash for $100,000, Credit Investment for $80,000, and Credit Gain for $20,000

  ( Cash received is 100,000 which will be debitted, investment was recorded in books at $4 per share, so it will be credited with 20,000 * $4 = 80,000 and the gain of $20,000 will go to gain account and not OCI account because it is a realised gain.)

18. b. Pratt Company must account for its Seecamp Investment using the FV accounting method.

  ( As now, Pratt have less than 20% of shares of Seecamp, it should use FV accounting method and not Equity method)