Question

On January 1, Landcaster Incorporated acquired 33% of the outstanding voting shares of Shadrach Company at a cost of $1,758 by acquiring 85,800 of the total 260,000 outstanding shares at a cost of $20.50 per share. Landcaster elected the fair value option During the year, Shadrach reported $1,240,000 in net income and declared and paid $1.18 per share dividends. At the end of the the fair value of the investment is $1,676,900

Requirements:a. Prepare the journal entry to record the acquisition of the investment securities.
b. Prepare the joumal entries at year-end to record the fair value adjustment at the end of the year of acquisition.
c. Prepare the journal entry to record the sale of 70% of the Shadrach common shares for $1,678,000 on January 1 of the year following the acquisition.

Answer 1

To answer the student's questions, journal entries were created for the acquisition of shares, the year-end fair value adjustment, and the sale of shares. Calculations are based on the cost of acquisition, year-end market value, and the proceeds from the sale of shares.

Step-by-step explanation:

The student has asked several accounting and investment-related questions concerning the acquisition and valuation of shares, as well as the journal entries associated with these transactions. Let's address each one step by step.

Acquisition of Investment Securities

To record the acquisition of Shadrach Company shares, Landcaster Incorporated would make the following journal entry:

• Investment in Shadrach Company: Debit $1,758,000
• Cash: Credit $1,758,000

Year-end Fair Value Adjustment

Quick assessment for the year-end fair value adjustment:

1. Determine the change in fair value: $1,676,900 (ending value) - $1,758,000 (cost) = -$81,100
2. Record the fair value adjustment:

• Loss on Investment in Shadrach Company: Debit $81,100
• Fair Value Adjustment: Credit $81,100

Sale of Shadrach Common Shares

When selling 70% of the shares on January 1 of the following year, the journal entry would be:

• Cash: Debit $1,678,000
• Investment in Shadrach Company: Credit an amount proportional to the shares sold
• Gain or Loss on Sale of Investment: Credit or Debit the difference between the sale proceeds and the carrying amount of the sold shares.