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Investment - Journal entries

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Bowers Investments bought 1,000 shares of IDA, Inc. common stock on Jan 1, Year 1, for $5,000 and 1,000 share of JOE, Inc. common stock on July 1, Year 1, for $6,000. IDA declared $500 in dividends, and JOE declared $600 in dividends on December 31, Year 1. At the end of Year 1, the market value of the IDA stock was $4,500 and the market value of the JOE stocks was $7,000. The stock was purchase for short-term speculation. Bowers owns 10% of each company.

1. The entry to record the purchase of IDA, Inc. common stock would
be which one of the following?
a. DR Trading securities-IDA common 5,000
CR Cash 5,000

b. DR Available-for-sale securities-IDA common 5,000
CR Cash 5,000

c. DR Cash 5,000
CR Trading securities-IDA common 5,000

d. DR Cash 5,000
CR available-for-sale securities-IDA common 5,000

2. Bowers should record the declaration of the JOE divident as shown in
which one of the following entries?

a. DR Cash 500
CR Dividend income 500

b. DR Dividends receivable 600
CR Dividend income 600

c. DR Dividend income 500
CR Dividends receivable 500

d. DR Dividend income 600
CR Dividends receivable 600

3. Which one of the following entries is appropriate for the mark to
market adjustment made by Bowers at the end of Year 1?
a. DR Market Adjustment-trading securities 500
CR Unrealized holding gain on trading securities 500

b. DR Unrealized holding gain on trading securites 500
CR Market adjustment-trading securities 500

c. DR Market Adjustment-trading securities 500
CR Unrealized holding loss on trading securities 500

d. DR Market adjustment-trading securities 500
CR Realized holding gain on trading securities 500

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Solution Preview

1. Since the stock is purchased for short term speculation, it is a trading security and so the journal entry would be
a. DR Trading securities-IDA common 5,000
CR ...

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The solution explains the journal entries relating to investments

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Investment Journal Entries

Hobson acquires 40% of the outstanding voting stock of Stokes Company on January 1, 2008,for $210,000 in cash. The book value of Stokes' net assets on the date was $400,000, although one company's buildings, with a $60,000 carrying value, was actually worth $100,000. This building had a 10-year remaining life. Stokes owned a royalty agreement with a 20-year remaining life that was undervalued by $85,000.

Stokes sold inventory with an original cost of $60,000 to Hobson during 2008 at a price of $90,000. Hobson still held $15,000(transfer price) of this amount in inventory as of December 31, 2008. These goods are to be sold to outside parties during 2009.

Stokes reported a loss of $60,000 for 2008, $40,000 from continuing operations, and $20,000 from an extraordinary loss. The company still manages to pay a $10,000 cash dividend during the year.

During 2009, Stokes reported a $40,000 net income and distributed a cash dividend of $12,000. It made additional inventory sales of $80,000 to Hobson during the period. The original cost of the merchandise as $50,000. All but 30% if this inventory had been resold to outside partied by the end of the 2009 fiscal year.

Prepare all journal entries for Hobson for 2008 and 2009 in connection with this investment assume that the equity method is applied.

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