Question

Selk Steel Co., which began operations in Year 1, had the following transactions and events in its long-term investments. Year 1

Jan. 5 Selk purchased 50,000 shares (20% of total) of Kildaire's common stock for $1,500,000. Oct. 23 Kildaire declared and paid a cash dividend of $2.40 per share.
Dec. 31 Kildaire's net income for the year is $1,112,000 and the fair value of its stock at December 31 is $34 per share.
Year 2
Oct. 15 Kildaire declared and paid a cash dividend of $3.30 per share.
Dec. 31 Kildaire's net income for the year is $1,166,000 and the fair value of its stock at December 31 is $37 per share.
Year 3
Jan. 2 Selk sold 2% (equal to 1,000 shares) of its investment in Kildaire for $68,000 cash.
Assume that although Selk owns 20% of Kildaire's outstanding stock, circumstances indicate that it does not have a significant influence over the investee.
Required:
Prepare journal entries to record the preceding transactions and events for Selk.

Answer 1

The journal entries for Selk Steel Co.'s long-term investments in Kildaire's common stock are provided for Year 1 to Year 3. These entries record the purchase of the stock, declaration and receipt of cash dividends, Kildaire's net income, and changes in the fair value of the stock.

Step-by-step explanation:

Journal entries for Selk Steel Co.:

Year 1:

Jan. 5:

• Debit: Long-term investment in Kildaire's common stock ($1,500,000)
• Credit: Cash ($1,500,000)

Oct. 23:

• Debit: Cash dividend receivable from Kildaire ($120,000)
• Credit: Dividend income ($120,000)

Dec. 31:

• Debit: Dividend income ($120,000)
• Credit: Cash dividend receivable from Kildaire ($120,000)

• Debit: Long-term investment in Kildaire's common stock ($600,000)
• Credit: Equity method adjustment - Kildaire's net income ($1,200,000 x 20%) ($240,000)
• Credit: Dividend income ($120,000)
• Credit: Unrealized holding gain - equity securities ($20 per share x 50,000 shares) ($1,000,000)

Year 2:

Oct. 15:

• Debit: Cash dividend receivable from Kildaire ($165,000)
• Credit: Dividend income ($165,000)

Year 3:

Jan. 2:

• Debit: Cash ($68,000)
• Credit: Long-term investment in Kildaire's common stock ($68,000)

Answer 2

To record the transactions and events for Selk Steel Co.'s long-term investments in Kildaire, journal entries need to be prepared. The journal entries include the purchase of the stock, declaration and payment of dividends, and the sale of a portion of the investment.

Step-by-step explanation:

To record the transactions and events for Selk Steel Co.'s long-term investments in Kildaire, journal entries need to be prepared. Here are the journal entries:

1. Jan. 5: Debit Investment in Kildaire (Long-term Investments) for $1,500,000 and credit Cash for $1,500,000 to record the purchase of 50,000 shares of Kildaire's common stock.
2. Oct. 23: Debit Cash Dividends Receivable for $120,000 (50,000 shares x $2.40 per share) and credit Dividend Revenue for $120,000 to record the declaration and payment of cash dividend by Kildaire.
3. Dec. 31: No journal entry is required since the increase in the fair value of Kildaire's stock is not recognized until it is sold.
4. Oct. 15 (Year 2): Debit Cash Dividends Receivable for $165,000 (50,000 shares x $3.30 per share) and credit Dividend Revenue for $165,000 to record the declaration and payment of cash dividend by Kildaire.
5. Dec. 31 (Year 2): No journal entry is required since the increase in the fair value of Kildaire's stock is not recognized until it is sold.
6. Jan. 2 (Year 3): Debit Cash for $68,000 and Credit Investment in Kildaire for $68,000 to record the sale of 1,000 shares of Kildaire's stock.