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Chapter 12: Brief Exercises (page 610)

Fairbanks Corporation purchased 400 shares of Sherman Inc. common stock for \(13,200 (Fairbanks does not have significant influence). During the year, Sherman paid a cash dividend of \)3.25 per share. At year-end, Sherman stock was selling for $34.50 per share. Prepare Fairbanks’ journal entries to record (a) the purchase of the investment, (b) the dividends received, and (c) the fair value adjustment. (Assume a zero balance in the Fair Value Adjustmentaccount.)

Short Answer

Expert verified

a) The amount debited to equity investment is $13,200.

b) The amount of dividend received is $1,300.

c) The gain on the investment is $600.

Step by step solution

01

Step-by-Step Solution Step 1: Definition of common stock 

Common stock is the stock in which the dividend amount is not fixed. Theamount of dividendsfluctuate.

02

 Journal entry of the purchase of the investment

Date

Description

Debit

Credit

A.

Equity Investment

$13,200

Cash

$13,200

Being entry to record the purchase of common stock

03

Journal entry for the interest received

Date

Description

Debit

Credit

B

Cash

$1,300

Investment Revenue

$1,300

Being entry of dividend received

04

Adjustment entry for the fair value

Date

Description

Debit

Credit

C

Investment in Equity*

$600

Gain on investment

$600

Being gained on the sale of common stock

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Most popular questions from this chapter

Question: Briefly describe some of the similarities and differences between GAAP and IFRS with respect to the accounting for intangible assets.

Question: Explain how the investment account is affected by investee activities under the equity method.

Zoop Corporation purchased for \(300,000 a 30% interest in Murphy, Inc. This investment enables Zoop to exert significant influence over Murphy. During the year, Murphy earned net income of \)180,000 and paid dividends of $60,000. Prepare Zoop’s journal entries related to this investment.

Question: Indicate whether the following items are capitalized or expensed in the current year. (a) Purchase cost of a patent from a competitor. (c) Organizational costs. (b) Research and development costs. (d) Costs incurred internally to create goodwill.

Question: (Accounting for Franchise, Patents, and Trademark) Information concerning Sandro Corporation’s intangible assets is as follows.

  1. On January 1, 2017, Sandro signed an agreement to operate as a franchisee of Hsian Copy Service, Inc. for an initial franchise fee of \(75,000. Of this amount, \)15,000 was paid when the agreement was signed, and the balance is payable in 4 annual payments of \(15,000 each, beginning January 1, 2018. The agreement provides that the down payment is not refundable and no future services are required of the franchisor. The present value at January 1, 2017, of the 4 annual payments discounted at 14% (the implicit rate for a loan of this type) is \)43,700. The agreement also provides that 5% of the revenue from the franchise must be paid to the franchisor annually. Sandro’s revenue from the franchise for 2017 was \(900,000. Sandro estimates the useful life of the franchise to be 10 years. (Hint: You may want to refer to Chapter 18 to determine the proper accounting treatment for the franchise fee and payments.)
  2. Sandro incurred \)65,000 of experimental and development costs in its laboratory to develop a patent that was granted on January 2, 2017. Legal fees and other costs associated with registration of the patent totaled \(17,600. Sandro estimates that the useful life of the patent will be 8 years.
  3. A trademark was purchased from Shanghai Company for \)36,000 on July 1, 2014. Expenditures for successful litigation in defense of the trademark totaling $10,200 were paid on July 1, 2017. Sandro estimates that the useful life of the trademark will be 20 years from the date of acquisition.

Instructions

  1. Prepare a schedule showing the intangible assets section of Sandro’s balance sheet at December 31, 2017. Show supporting computations in good form.

Prepare a schedule showing all expenses resulting from the transactions that would appear on Sandro’s income statement for the year ended December 31, 2017. Show supporting computations in good form.

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