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    Fair Value and Equity Method for purchase of Kulikowski Inc

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    Jaycie Phelps Inc. acquired 20% of the outstanding common stock of Theresa Kulikowski Inc. on December 31, 2008. 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, 2009. Kulikowski reported net income of $730,000 for 2009. The fair value of Kulikowski's stock was $27 per share at December 31, 2009.

    INSTRUCTIONS:

    a) Prepare the journal entries for Jaycie Phelps Inc. for 2008 and 2009, assuming that Phelps CANNOT exercise significant influence over Kulikowski. The securities should be classified as available-for-sale.

    b) Prepare the journal entries for Jaycie Phelps Inc. for 2008 and 2009, 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, 2009? What is the total net income reported in 2009 under each of these methods?

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    Solution Preview

    ANSWERS

    Instruction A
    2008
    DR: Available for sale investment 1,200,000
    CR:Cash 1,200,000

    2009
    DR: Cash 42,500
    CR: Dividend revenue 42,500

    DR: Cash 42,500
    CR: Dividend revenue 42,500

    DR: ...

    Solution Summary

    Fair value and equity method for purchase of Kulikowski Inc is examined.

    $2.19

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