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E17-12 (Journal Entries for Fair Value and Equity Methods)

E17-12 (Journal Entries for Fair Value and Equity Methods)

Situation 1
Conchita Cosmetics acquired 10% of the 200,000 shares of common stock of Martinez Fashion at a total cost of $13 per share on March 18, 2007. On June 30, Martinez declared and paid a $75,000 cash dividend. On December 31, Martinez reported net income of $122,000 for the year. At December 31, the market price of Martinez Fashion was $15 per share. The securities are classified as available-for-sale.

Situation 2
Monica, Inc. obtained significant influence over Seles Corporation by buying 30% of Seles's 30,000 outstanding shares of common stock at a total cost of $9 per share on January 1, 2007. On June 15, Seles declared and paid a cash dividend of $36,000. On December 31, Seles reported a net income of $85,000 for the year.

Prepare all necessary journal entries in 2007 for both situations.

Solution Preview

See attached MS Word document showing how to journalize entries.

Background Information
Fair value is the amount for which a security could be sold in a normal market. For the purpose of valuation and reporting at a financial statement date, companies classify debt and stock investments into three categories, trading, available-for-sale, and held-to-maturity. Trading securities are bought and held primarily for sale in the near term to generate income on short-term price differences. Available-for-sale securities are held with the intent of selling them sometime in the future. Held-to-maturity securities are debt securities that the investor has the ...

Solution Summary

This solution is comprised of an accounting exercise which shows a detailed explanation of how to journalize entries for fair value and equity methods. The exercise shown here also includes a brief explanation of what is meant by fair value and equity method to provide students with a clear understanding of this topic.

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