Question

Presented below are two independent situations.Gambino Cosmetics acquired 10% of the 200,000 shares of common stock of Nevins Fashion at a total cost of $13 per share on March 18, 2015. On June 30, Nevins declared and paid a $60,000 dividend. On December 31, Nevins reported net income of $122,000 for the year. At December 31, the market price of Nevins Fashion was $15 per share. The stock is classified as available-for-sale.Kanza, Inc., obtained significant influence over Rogan Corporation by buying 40% of Rogan’s 30,000 outstanding shares of common stock at a total cost of $9 per share on January 1, 2015. On June 15, Rogan declared and paid a cash dividend of $30,000. On December 31, Rogan reported a net income of $80,000 for the year.InstructionsPrepare all the necessary journal entries for 2015 for (a) Gambino Cosmetics and (b) Kanza, Inc.

Answer 1

Answer:

See the explanation below

Explanation:

(a) Gambino Cosmetics

Since Gambino Cosmetics just 15% which is less than 20% of Nevins Fashion, the cost method for accounting for investments is the relevant method that is used as follows:

Stock investment = 10% * 200,000 * $13 = $260,000

Dividend income = 10% * $60,000 = $6,000

Available-for-sale (AFS) reserve = 10% * $122,000 = $12,000

Date                       Details                              Dr ($)               Cr ($)          

08 Mar. ‘15           Stock investments           260,000

                             Cash                                                      260,000

                             To record investment in Nevins Fashion                      

30 Jun. ‘15           Cash                                      6,000

                            Dividend income                                         6,000

                            To record dividend income from investment in Nevins Fashion

31 Dec. ’15           Stock investments              12,000

                            AFS Reserve                                               12,000

                            To record share of income in Nevins Fashion              

(b) Kanza, Inc.,

Since Kanza, Inc. acquired 40% in Rogan Corporation which is greater than 20%, the equity method for accounting for investments is the relevant method that is used as follows:

Stock investment = 40% * 30,000 * $9 = $108,000

Dividend income = 40% * $30,000 = $12,000

Investment revenue = 40% * $80,000 = $32,000

Date                       Details                         Dr ($)                      Cr ($)        

01 Jan. ‘15           Stock investments        108,000

                            Cash                                                           108,000

                            To record investment in Rogan Corporation                  

15 Jun. ‘15           Cash                                12,000

                           Stock investment                                         12,000

                           To record dividend received from investment in Rogan Corporation

31 Dec. ’15           Stock investments          32,000

                            Investment revenue                                  32,000

                           To record share of income in Rogan Corporation