Question

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.

Answer 1

Answer:

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