Question

Problem 15-4A Accounting for long-term investments in securities; with and without significant influence LO P3, P4

[The following information applies to the questions displayed below.]

Selk Steel Co., which began operations on January 4, 2017, had the following subsequent transactions and events in its long-term investments.

2017

Jan.	5	Selk purchased 50,000 shares (25% of total) of Kildaire's common stock for $1,000,000.
Oct.	23	Kildaire declared and paid a cash dividend of $4.30 per share.
Dec.	31	Kildaire's net income for 2017 is $1,274,000, and the fair value of its stock at December 31 is $31.10 per share.

2018

Oct.	15	Kildaire declared and paid a cash dividend of $3.20 per share.
Dec.	31	Kildaire's net income for 2018 is $1,586,000, and the fair value of its stock at December 31 is $33.10 per share.

2019

Jan.

2

Selk sold all of its investment in Kildaire for $1,598,000 cash.

Problem 15-4A Part 2

Part 2
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, 2019, to remove any balance related to the fair value adjustment. (If no entry is required for a transaction/event, select "No journal entry required" in the first account field.)

2. Compute the cost per share of Selk’s investment in Kildaire common stock as reflected in the investment account on January 1, 2019.

3. Compute the net increase or decrease in Selk’s equity from January 5, 2017, through January 2, 2019, resulting from its investment in Kildaire.

Answer 1

1. Prepare journal entries to record the preceding transactions and events for Selk.

Date	General Journal	Debit	Credit
2017
Jan. 05	Long-Term Investment-Kildaire	$1,000,000
	Cash		$1,000,000
	(To record purchase of Investment)
Oct. 23	Cash (50,000 shares × $4.30)	$215,000
	Long-Term Investment-Kildaire		$215,000
	(To record cash dividend received)
Dec. 31	Long-Term Investment-Kildaire ($1,274,000 × 25%)	$318,500
	Earnings from Long Term Investment		$318,500
	(To record earnings from investment)
2018
Oct. 15	Cash (50,000 shares × $3.20)	$160,000
	Long-Term Investment-Kildaire		$160,000
	(To record cash dividend received)
Dec. 31	Long-Term Investment-Kildaire ($1,586,000 × 25%)	$396,500
	Earnings from Long Term Investment		$396,500
	(To record earnings from investment)
2019
Jan. 02	Cash	$1,598,000
	Gain on sale of Investment		$258,000
	Long-term investments-Kildaire (W.N)		$1,340,000

Working note:

Investment carrying value, january 02, 2019
Original cost	$1,000,000
Less: 2017 dividends	($215,000)
Add: 2017 earnings	$318,500
Less: 2018 dividends	($160,000)
Add: 2018 earnings	$396,500
Carrying value of Investment in Kildare	$1,340,000

_____________________________________________________________

2.

Compute the cost per share of Selk’s investment in Kildaire common stock as reflected in the investment account on January 1, 2019.

Cost per share = $1,340,000 50,000 = $26.8

___________________________________________________________

3. Compute the net increase or decrease in Selk’s equity from January 5, 2017, through January 2, 2019, resulting from its investment in Kildaire.

Change in Selk' equity due to stock Investment
Earnings from Kildaire (2017)	$318,500
Earnings from Kildaire (2018)	$396,500
Gain on sale of Investment	$258,000
Net Increase	$973,000