Question

Assume an investor company acquires for $320,000 an 8% investment in the common stock of an investee company on February 15, 2018. The investor determined the common stock of the investee has a readily determinable fair value. On December 31, 2018, the fair value of the 8% common stock investment is $340,000, and the investor company made made all of the appropriate adjustments in preparation of the annual financial statements. On March 1, 2019, the investor company acquires an additional 17% of common stock of the investee for $765,000, thereby increasing the investor's overall ownership interest to 25%.

Required
a. For this question only, assume instead that the investor determined, on February 15, 2018, that the common stock of the investee does not have a readily determinable fair value. In addition, the investor company determined that the additional 17% common stock purchase on March 1, 2019 does qualify as an observable price change in orderly transaction. Prepare the journal entries the investor company should record on March 1, 2019.
Note: If a journal entry is not required, select "N/A" as your answers for the drop-down options and leave the Debit and Credit answers blank (zero).
Description Debit Credit
To adjust value of investment account.
To record the purchase of additional stock.
b. For this question only, assume instead that the investor determined, on February 15, 2018, that the common stock of the investee does not have a readily determinable fair value. In addition, the investor company determined that the additional 17% common stock purchase on March 1, 2019 does not qualify as an observable price change in orderly transaction. Prepare the journal entries the investor company should record on March 1, 2019.
Note: If a journal entry is not required, select "N/A" as your answers for the drop-down options and leave the Debit and Credit answers blank (zero).
Description Debit Credit
To adjust value of investment account.
To record the purchase of additional stock.

Answer 1

The investor company should record journal entries on March 1, 2019, to adjust the value of the investment account and record the purchase of additional stock.

Step-by-step explanation:

In this scenario, the investor company has acquired an additional 17% of the common stock of the investee on March 1, 2019. We are assuming that the common stock of the investee does not have a readily determinable fair value. Additionally, we are assuming that the additional stock purchase qualifies as an observable price change in an orderly transaction.

The journal entries to be recorded on March 1, 2019, are as follows:

1. To adjust the value of the investment account:
   Debit: Investment in Common Stock (8%)*
   Credit: Unrealized Holding Gain or Loss – Equity (OCI account, 17%*)
2. To record the purchase of additional stock:
   (Assuming the purchase is made in cash)
   Debit: Investment in Common Stock (17%*)
   Credit: Cash

Note: *The percentage represents the ownership interest of the investor in the investee company.