Chapter 17: Equity Investments Flashcards
What are the three types of classifications for equity investments?
Small - Less than 20%
Significant - Between 20% and 50%
Control - Greater than 50%
What type of valuation is done when a company owns less than 20% of a company’s stock?
Fair Value Method
How are unrealized holding gains or losses recognized when a company owns less than 20% of a company’s stock?
Recognized in Net Income
What type of valuation is done when a company owns between 20% and 50% of a company’s stock?
Equity Method
What type of valuation is done when a company owns greater than 50% of a company’s stock?
Consolidation Method
———— Background Information ————–
On October 1, 2021, Werewolf Corporation purchased common stock of Full Moon Company,
paying $370,000 for 18,500 shares of common stock.
This ownership represents a 15% ownership of Full Moon Company.
———– Question—————
What does the journal entry look like for the acquisition of this stock?
Acquisition.
- Record the purchase of the stock
Dr. Equity Investments 370,000
Cr. Cash 370,000
———— Background Information ————–
On October 1, 2021, Werewolf Corporation purchased common stock of Full Moon Company,
paying $370,000 for 18,500 shares of common stock.
This ownership represents a 15% ownership of Full Moon Company.
———– Question—————
On November 1, Werewolf received a $1 per share dividend on the Full Moon Company stock.
What does this journal entry look like?
Receipt of Dividend.
- Receipt of dividend is revenue for Werewolf
Dr. Cash 18,500
Cr. Dividend Revenue 18,500
———— Background Information ————–
On October 1, 2021, Werewolf Corporation purchased common stock of Full Moon Company,
paying $370,000 for 18,500 shares of common stock.
This ownership represents a 15% ownership of Full Moon Company.
———– Question—————
On December 31, Full Moon Company’s stock was trading at $23 per share when it closed its books for the fourth quarter, recognizing $980,500 of net
income.
What does this journal entry look like?
Recording face value.
- Recording face value of stock on the date Werewolf closes its books. The unrealized gain
is going to show up in net income.
Dr. Unrealized holding gain 55,500
Cr. Fair Value adjustment 55,500
———— Background Information ————–
On October 1, 2021, Werewolf Corporation purchased common stock of Full Moon Company,
paying $370,000 for 18,500 shares of common stock.
This ownership represents a 15% ownership of Full Moon Company.
———– Question—————
On January 18, 2022, Werewolf sells its interest in Full Moon Company for $434,750.
What journal entries does Werewolf need to make to record the purchase, holding, and sale of
Full Moon Company stock?
Sale of stock
- Sale of stock
Dr. Cash 434,750
Cr. Equity Investment 370,000
Cr. Gain on sale of Investment 64,750
———— Background Information ————–
On October 1, 2021, Werewolf Corporation purchased common stock of Full Moon Company, paying $370,000 for 18,500 shares of common stock. This ownership represents a 40% ownership of Full Moon Company.
———– Question—————
What journal entries does Werewolf need to make to record the purchase?
Acquisition.
- Record the purchase of the stock
Dr. Equity Investments 370,000
Cr. Cash 370,000
———— Background Information ————–
On October 1, 2021, Werewolf Corporation purchased common stock of Full Moon Company, paying $370,000 for 18,500 shares of common stock. This ownership represents a 40% ownership of Full Moon Company.
———– Question—————
On November 1, Werewolf received a $1 per share dividend on the Full Moon Company stock.
What journal entries does Werewolf need to make to record the dividend?
Receipt of Dividend.
- Receipt of dividend is revenue for Werewolf
Dr. Cash 18,500
Cr. Equity Investments 18,500
———— Background Information ————–
On October 1, 2021, Werewolf Corporation purchased common stock of Full Moon Company, paying $370,000 for 18,500 shares of common stock. This ownership represents a 40% ownership of Full Moon Company.
———– Question—————
On December 31, Full Moon Company’s stock was trading at $23 per share when it closed its books for the fourth quarter.
What journal entry is required to close the books?
Recording face value.
- No entry is needed as equity investment is not adjusted to fair value.
———— Background Information ————–
On October 1, 2021, Werewolf Corporation purchased common stock of Full Moon Company, paying $370,000 for 18,500 shares of common stock. This ownership represents a 40% ownership of Full Moon Company.
———– Question————–
On December 31, Full Moon Company’s recognizes $980,000 of net income.
What journal entry is required ?
Recording of reported income.
- Werewolf reports its share of Full Moon Company’s income, 40% of 980,000 is 392,000.
Dr. Equity Investment 392,000
Cr. Investment Income 392,000
———— Background Information ————–
On October 1, 2021, Werewolf Corporation purchased common stock of Full Moon Company, paying $370,000 for 18,500 shares of common stock. This ownership represents a 40% ownership of Full Moon Company.
———– Question————–
The stock is sold for $434,750. What journal entry must be made?
Sale of stock
- Sale of stock.
Need to find the balance of the equity investment account = 370,000 –
18,500 + 392,000 = 743,500
Dr. Cash 434,750
Dr. Loss on sale of Investment 308,750
Cr. Equity Investment 743,500
———— Background Information ————–
On October 1, 2021, Werewolf Corporation purchased common stock of Full Moon Company, paying $370,000 for 18,500 shares of common stock. This ownership represents a 80% ownership of Full Moon Company.
———– Question————–
What journal entry is required ?
Acquisition.
Record the purchase of all the company by showing all Full Moon Company assets and liabilities on the books, with 80% being subtracted as non-controlling interest.
