E17-12 (Journal Entries for Fair Value and Equity Methods)
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E17-12 (Journal Entries for Fair Value and Equity Methods)
Situation 1
Conchita Cosmetics acquired 10% of the 200,000 shares of common stock of Martinez Fashion at a total cost of $13 per share on March 18, 2007. On June 30, Martinez declared and paid a $75,000 cash dividend. On December 31, Martinez reported net income of $122,000 for the year. At December 31, the market price of Martinez Fashion was $15 per share. The securities are classified as available-for-sale.
Situation 2
Monica, Inc. obtained significant influence over Seles Corporation by buying 30% of Seles's 30,000 outstanding shares of common stock at a total cost of $9 per share on January 1, 2007. On June 15, Seles declared and paid a cash dividend of $36,000. On December 31, Seles reported a net income of $85,000 for the year.
Prepare all necessary journal entries in 2007 for both situations.
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Solution Summary
This solution is comprised of an accounting exercise which shows a detailed explanation of how to journalize entries for fair value and equity methods. The exercise shown here also includes a brief explanation of what is meant by fair value and equity method to provide students with a clear understanding of this topic.
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Solution Preview
See attached MS Word document showing how to journalize entries.
Background Information
Fair value is the amount for which a security could be sold in a normal market. For the purpose of valuation and reporting at a financial statement date, companies classify debt and stock investments into three categories, trading, available-for-sale, and held-to-maturity. Trading securities are bought and held primarily for sale in the near term to generate income on short-term price differences. Available-for-sale securities are held with the intent of selling them sometime in the future. Held-to-maturity securities are debt securities that the investor has the ...
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