Phelps Inc. acquired 20% of the outstanding common stock of Theresa Kulikowski Inc. on December 31, 2020. The purchase price was $1,200,000 for 50,000 shares. Kulikowski Inc declared and paid an 50.85 per share cash dividend on June 30 and on December 31, 2021. Kulikowski reported net income of $730,000 for 2021. The fair value of Kulikowski's stock was $27 per share at December 31, 2021
Required:
a. Prepare the journal entries for Jayce Phelps inc. for 2020 and 2021, assuming that Phelps cannot exercise significant influence over Kulkowski.
b. Prepare the journal entries for Jayce Phelps Inc. for 2020 and 2021, 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, 2021? What is the total net income reported in 2021 under each of these methods?

Answer and Explanation:

Phelps Inc

a)

DateAccount titles and ExplanationDebit ($)Credit ($)

Dec.31,2020

Dr Equity Investments 1,200,000

Cr Cash 1,200,000

June 30,2021

Dr Cash (50,000 shares * $0.85)42,500

Cr Dividend Revenue 42,500

Dec. 31, 2021

Dr Cash (50,000 shares * $0.85) 42,500

Cr Dividend Revenue 42,500

Dr Fair Value Adjustment (Available-for-Sale)150,000

Cr Unrealized Holding Gain or Loss - Equity* 150,000

Unrealized Holding Gain or Loss - Equity-

Amount ($)

Cost1,200,000

Fair Value (50,000 shares * $27)1,350,000

Unrealized Gain or (Loss)150,000

b)

DateParticularsDebit ($)Credit ($)

Dec.31,2020

Dr Equity Investments (Kulikowski Stock)

1,200,000

Cr Cash 1,200,000

June 30,2021

Dr Cash (50,000 shares * $0.85)42,500

Cr Equity Investment (Kulikowoski Stock)42,500

Dec. 31, 2021

Dr Cash (50,000 shares * $0.85)42,500

Cr Equity Investments (Kulikowski)42,500

Dec 31, 2021

Dr Equity Investment (Kulikowski Stock)146,000

CrRevenue from Investments (730000 * 20%) 146,000

c)

Reporting of investment in securities on the balance sheet:

Fair value method = (1,200,000+150,000)

= 1,350,000

Equity method = (1,200,000-42,500-42,500+146,000) = 1,261,000

Reporting on net income on the income statement:

Fair value method = Dividend Revenue = (42,500+42,500)= 85,000

Equity meethod = Revenue from investments = 146,000

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answerpurchase-occasion segmentation;