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14 December, 17:23

Presented below are two independent situations. Gambino Cosmetics acquired 10% of the 200,000 shares of common stock of Nevins Fashion at a total cost of $13 per share on March 18, 2015. On June 30, Nevins declared and paid a $60,000 dividend. On December 31, Nevins reported net income of $122,000 for the year. At December 31, the market price of Nevins Fashion was $15 per share. The stock is classified as available-for-sale. Kanza, Inc., obtained significant influence over Rogan Corporation by buying 40% of Rogan's 30,000 outstanding shares of common stock at a total cost of $9 per share on January 1, 2015. On June 15, Rogan declared and paid a cash dividend of $30,000. On December 31, Rogan reported a net income of $80,000 for the year. InstructionsPrepare all the necessary journal entries for 2015 for (a) Gambino Cosmetics and (b) Kanza, Inc.

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  1. 14 December, 17:27
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    See the explanation below

    Explanation:

    (a) Gambino Cosmetics

    Since Gambino Cosmetics just 15% which is less than 20% of Nevins Fashion, the cost method for accounting for investments is the relevant method that is used as follows:

    Stock investment = 10% * 200,000 * $13 = $260,000

    Dividend income = 10% * $60,000 = $6,000

    Available-for-sale (AFS) reserve = 10% * $122,000 = $12,000

    Date Details Dr ($) Cr ($)

    08 Mar. '15 Stock investments 260,000

    Cash 260,000

    To record investment in Nevins Fashion

    30 Jun. '15 Cash 6,000

    Dividend income 6,000

    To record dividend income from investment in Nevins Fashion

    31 Dec. '15 Stock investments 12,000

    AFS Reserve 12,000

    To record share of income in Nevins Fashion

    (b) Kanza, Inc.,

    Since Kanza, Inc. acquired 40% in Rogan Corporation which is greater than 20%, the equity method for accounting for investments is the relevant method that is used as follows:

    Stock investment = 40% * 30,000 * $9 = $108,000

    Dividend income = 40% * $30,000 = $12,000

    Investment revenue = 40% * $80,000 = $32,000

    Date Details Dr ($) Cr ($)

    01 Jan. '15 Stock investments 108,000

    Cash 108,000

    To record investment in Rogan Corporation

    15 Jun. '15 Cash 12,000

    Stock investment 12,000

    To record dividend received from investment in Rogan Corporation

    31 Dec. '15 Stock investments 32,000

    Investment revenue 32,000

    To record share of income in Rogan Corporation
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