[Omar]

On June 30, 20X0, MS Corporation purchased 10% of DP Corporation’s 25,000 shares of outstanding common stock. MS purchased the shares of DP at a three-month low of $22 per share. At the time of the purchase MS concluded that significant influence over DP was not achieved by the 10% ownership. MS decided to categorize the purchase of DP as Available for Sale. On January 1, 20X3, MS purchased an additional 20% of DP’s 25,000 shares of outstanding common stock for $28 per share. At this time MS will be able to exercise significant influence, therefore causing MS to switch from the fair value method (Available for Sale) to the equity method of accounting for the DP investment. DP reports net income and pays dividends on December 31 of each year. Information about DP for the years 20X0 through 20X2 is as follows:

Year Net Income Cash Dividends

20X0 $49,500 $11,000

20X1 $40,500 $9,000

20X2 $63,000 $14,000

Fair Market Values of DP Stock

6/30/X0 $22 per share

12/31/X0 $18 per share

12/31/X1 $26 per share

12/31/X2 $28 per share

1/1/X3 $28 per share

Prepare journal entries to record the required adjustments to reflect the stock acquisition (the entries to account for the transformation from the fair value method (AFS) to the equity method and to continue on under the equity method). Although all shaded cells may not necessarily be used, an entry must be made in each cell (e.g., “(blank)” or “0”).

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The answer:

Date Account debited Account credited Dr. Cr.

1/1/X3 Investment – DP stock (blank) 11,900

(blank) Retained earnings

11,900

(blank) (blank)

1/1/X3 Unrealized holding gain/loss – OCI (blank) 15,000

(blank) Security fair value adjustment

15,000

(blank) (blank)

1/1/X3 Investment – DP stock (blank) 140,000

(blank) Cash

140,000

(blank) (blank)

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I think this answer is not right because the FV of the first 10% under cost method is 70000 in 1/1/X3. It should be:

1/1/X3 Unrealized holding gain/loss – OCI 15,000

Retained earnings

11,900

Investment – DP stock

3,100

1/1/X3 Investment – DP stock

140,000

Cash – 140,000

Any help?

FAR: 73, 85
BEC: 79
REG: TBA
AUD: TBA