(Fair Value and Equity Method Compared) Jaycie Phelps Inc. acquired 20% of the outstanding common

stock of Theresa Kulikowski Inc. on December 31, 2017. The purchase price was \(1,200,000 for 50,000 shares. Kulikowski Inc.

declared and paid an \)0.85 per share cash dividend on June 30 and on December 31, 2018. Kulikowski reported a net income of

\(730,000 for 2018. The fair value of Kulikowski’s stock was \)27 per share on December 31, 2018.

Instructions

(a) Prepare the journal entries for Jaycie Phelps Inc. for 2017 and 2018, assuming that Phelps cannot exercise significant

influence over Kulikowski.

(b) Prepare the journal entries for Jaycie Phelps Inc. for 2017 and 2018, assuming that Phelps can exercise significant influence

over Kulikowski.

(c) At what amount is the investment in securities reported on the balance sheet under each of these methods at December

31, 2018? What is the total net income reported in 2018 under each of these methods?

Date

Particulars

Debit

Credit

December 31, 2017

Equity Investment

$1,200,000

Cash

$1,200,000

(Entry for the purchase of outstanding common stock)

June 30, 2018

Cash (50,000 * $0.85)

$42,500

Dividend Revenue

$42,500

(Half yearly dividend received on shares)

December 31, 2018

Cash

$42,500

Dividend Revenue

$42,500

(Half yearly interest received)

December 31, 2018

Unrealized holding G/L- Income

$150,000

Fair value adjustment

$150,000

(adjustment of fair value)

Date

Particulars

Debit

Credit

December 31, 2017

Equity Investment

$1,200,000

Cash

$1,200,000

(Entry for the purchase of outstanding common stock)

June 30, 2018

Cash

$42,500

Dividend Revenue

$42,500

(Half yearly dividend received on shares)

December 31, 2018

Cash

$42,500

Dividend Revenue

$42,500

(Half yearly interest received)

December 31, 2018

Equity Investment

$146,000

Revenue from Investment ($730,000*20%)

$146,000

(recording of income from investment)

Fair value method

Equity Method

$1,350,000 ($27*50,000)

$1,261,000

Dividend Revenue(income statement)

$85,000 ($42,500 + $42,500)

Income from investment(income statement)

$146,000 ($1,200,000-$146,000-$85,000)