On March 31, 2018, Chow Brothers, Inc., bought 10% of KT Manufacturing's capital stock for $50 million. KT's net income for the year ended December 31, 2018, was $80 million. The fair value of the shares held by Chow was $35 million at December 31, 2018. KT did not declare or pay a dividend during 2018. Required: 1. Prepare all appropriate journal entries related to the investment during 2018. 2. Assume that Chow sold the stock on January 20, 2019 for $30 million. Prepare the journal entries to record the sale.

Question

Madilyn

Business

4 September, 04:36

On March 31, 2018, Chow Brothers, Inc., bought 10% of KT Manufacturing's capital stock for $50 million. KT's net income for the year ended December 31, 2018, was $80 million. The fair value of the shares held by Chow was $35 million at December 31, 2018. KT did not declare or pay a dividend during 2018. Required: 1. Prepare all appropriate journal entries related to the investment during 2018. 2. Assume that Chow sold the stock on January 20, 2019 for $30 million. Prepare the journal entries to record the sale.

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Sage Odonnell · Answer 1

As worked out below

Explanation:

1. Journal entries for the investment in 2018

General Journal

Date Details Debit Credit

31 March 2018 Investment stock $50,000,000

Cash $50,000,000

Being a record of the investment in stock

31 Dec 2018 Unrealized holding gain $15,000,000

Adjustment of fair value $15,000,000 w-1

Being a record of adjustment of fair value

2. Journal entries for sale

General Journal

Date Details Debit Credit

20 Jan 2019 Holding gain/loss unrealized $5,000,000 w-2

Fair value adjustment $5,000,000

Being a record of adjustment of fair value before sale

20 Jan 2019 Cash $30,000,000

Holding gain realized $20,000,000

Investment stock $50,000,000

Being a record of the sale of the stock

Workings:

W-1

$50,000,000 - $35,000,000 = $15,000,000

W-2

$50,000,000 - $30,000,000 - $15,000,000 = $5,000,000