Bonita cosmetics acquired 10% of the 218,000 shares of common stock of martinez fashion at a total cost of $13 per share on march 18, 2017. on june 30, martinez declared and paid $71,300 cash dividend to all stockholders. on december 31, martinez reported net income of $118,000 for the year. at december 31, the market price of martinez fashion was $14 per share. situation 2 windsor, inc. obtained significant influence over seles corporation by buying 30% of seles’s 32,300 outstanding shares of common stock at a total cost of $8 per share on january 1, 2017. on june 15, seles declared and paid cash dividends of $35,200. on december 31, seles reported a net income of $82,000 for the year.

See explanation section

Explanation:

Req. A: Situation 1

Mar 18   Available for sale of stocks of MF  Debit   $283,400

                                                Cash               Credit             $283,400

Note: As Bonita acquired 10% of Martinez shares at $13, total cash has to be paid to Martinez Fashion = (218,000*10%) × $13 = 21,800 shares × $13 = $283,400.

Jun 30       Cash                                             Debit   $7,130

                                    Dividend Revenue    Credit                $7,130

Note: As Martinez declared $71,300 to all stockholders, Bonita will receive 10% of those dividends as they acquired 10% of the total stocks. The cash received from the MF is = $71,300 × 10% = $7,130.

Securities Fair Value

Dec 31        Adjustment                      Debit     $21,800

                        Unrealized holding gain (loss)- Equity    Credit     $21,800

Note: As the market price of the share increased to $14-$13 = $1, Bonita would gain from the increased market price. Total gain = $1 × (218,000 shares × 10%) = $21,800.

Req. B Situation 2

Investment in Seles

Jan 1          Common stock of Seles Corp.     Debit      $77,520

                                       Cash                         Credit             $77,520

Note: As Windsor, Inc. obtained 30% of Martinez shares at $8, total cash has to be paid to Martinez Fashion = (32,300*30%) × $8 = 9,690 shares × $8 = $77,520.

Jun 15        Cash                                           Debit         $10,560

                            Dividend Revenue          Credit             $10,560

Note: As Seles declared $32,300 to all stockholders, Windsor, Inc. will receive 30% of those dividends as they acquired 30% of the total stocks. The cash received from the MF is = $32,300 × 30% = $10,560.

                  Investment in Seles

Dec 31        Cash                   Debit          $24,600

                                    Revenue     Credit                       $24,600

Note: As Seles reported a net income of $82,000, due to acquiring 30% of Seles stock, Windsor, Inc. will receive 30% of its net income. The revenue is = $82,000 × 30% = $24,600.

answer; dividing net income by 1- t ;