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E17-11 ( Equity Invesment Entries and Financial Statement Presentation)

At December 31, 2010, the equty invesment portofolio for Wenger, Inc. is as follows

invesment cost fair value unrealized gain(loss)


A $17,500 $15,000 ($2,500)
B 12,500 14,000 1,500
C 23,000 25,500 2,500
total $53,000 $54,000 1,500

On January 20,11 wenger inc sold invesment A for 15,300. the sale proceeds are net of brokerage fees.
instructions
(a) prepare the adjusting entry at december 31, 2010 to report the portofolio at fair value
(b) show the statement of financial position presentation of thr invesment related acc at december 31, 2010
(c) prepare the journal entry for the 2011 sale invesment A
(d) repeat requirement (a), assuming the portofolio of invesment is non tranding
Answer
(a) The portfolio should be reported at the fair value of $54,500. Since the cost of the portfolio is $53,000, the unrealized
holding gain is $1,500, of which $200 is already recognized. Therefore, the December 31, 2010 adjusting entry should be:
Securities Fair Value Adjustment 1,300
Unrealized Holding Gain or Loss—Income 1,300

(b) The unrealized holding gain of $1,300 should be reported as other income and expense on the income statement and
the Securities Fair Value Adjustment account balance of $1,500 should be added to the cost of the investment account.

WENGER, INC.
Statement of Financial Position
As of December 31, 2010
Current assets:
Equity investment $54,500
(c) Computation of realized gain or loss on sale of investment
Net proceeds from sale of investment $15,300
Cost of investment A 17,500
Loss on sale of shares -2200

20-Jan-11
cash 15,300
Loss on Sale of Equity Investment 2,200
Equity Investments 17500

(d) Securities Fair Value Adjustment 1,300


Unrealized Holding Gain or Loss—Equity 1,300

E17-13 ( Journal entries for fair value and equity methode)


Presented below are two independent situation

Situation 1
Hatcher cosmetics acquired 10% of the 200,000 ordinary shares of Ramirez fashion at a total cost $14 per share on March 18, 10
On june 30, Ramirez declared and paid $75,000 cash dividen. On december 3, ramirez reported net income of $122,000 for
the year. At 31 december, the market price of ramirez wash $15 per shares. The invesment is clasified as trading.

Situation 2
Holmes inc. obtained significant influence over nadal co. by buying 25% of Nadal's 30,000 outstanding ordinary shares at a
total cost of $9 per share on january 1, 2010. on june 15, Nadal declared and paid a cash dividen of $36,000. on december 31,
Nadal reported a net income of $85,000 for the year.

instructions
Prepare all necessary journal entries in 2010 for both situations.u
Situation 1: Journal entries by Hatcher Cosmetics:
To record purchase of 20,000 shares of Ramirez Fashion at a cost of$14 per share:

18-Mar-10
Equity Investments 280,000
Cash 280,000

To record the dividend revenue from Ramirez Fashion:

30-Jun-10
Cash 7,500
Dividend Revenue ($75,000 X 10%) 7,500

To record the investment at fair value:


31-Dec-10
Securities Fair Value Adjustment 20,000
Unrealized Holding Gain or Loss—Income 20,000*
*($15 – $14) X 20,000 shares = $20,000

Situation 2 Journal entries by Holmes, Inc.


To record the purchase of 25% of Nadal Corporation’s ordinary shares:

1-Jan-10
Equity Investments 67,500
Cash [(30,000 X 25%) X $9] 67,500
Since Holmes, Inc. obtained significant influence over Nadal Corp., Holmes, Inc. now employs the equity method of accounting

To record the receipt of cash dividends from Nadal Corporation:


15-Jun-10
Cash ($36,000 X 25%) 9,000
Equity Investments 9,000

To record Holmes’s share (25%) of Nadal Corporation’s net income of $85,000


31-Dec-10
Equity Investments (25% X $85,000) 21,250
Revenue from Investment 21,250