Question

Bonita Cosmetics acquired 10% of the 218,000 shares of common stock of Martinez Fashion at a total cost of $13 per share on March 18, 2017. On June 30, Martinez declared and paid $71,300 cash dividend to all stockholders. On December 31, Martinez reported net income of $118,000 for the year. At December 31, the market price of Martinez Fashion was $14 per share. Situation 2 Windsor, Inc. obtained significant influence over Seles Corporation by buying 30% of Seles’s 32,300 outstanding shares of common stock at a total cost of $8 per share on January 1, 2017. On June 15, Seles declared and paid cash dividends of $35,200. On December 31, Seles reported a net income of $82,000 for the year.

Answer 1

See explanation section

Step-by-step explanation:

Req. A: Situation 1

Mar 18 Available for sale of stocks of MF Debit $283,400

Cash Credit $283,400

Note: As Bonita acquired 10% of Martinez shares at $13, total cash has to be paid to Martinez Fashion = (218,000*10%) × $13 = 21,800 shares × $13 = $283,400.

Jun 30 Cash Debit $7,130

Dividend Revenue Credit $7,130

Note: As Martinez declared $71,300 to all stockholders, Bonita will receive 10% of those dividends as they acquired 10% of the total stocks. The cash received from the MF is = $71,300 × 10% = $7,130.

Securities Fair Value

Dec 31 Adjustment Debit $21,800

Unrealized holding gain (loss)- Equity Credit $21,800

Note: As the market price of the share increased to $14-$13 = $1, Bonita would gain from the increased market price. Total gain = $1 × (218,000 shares × 10%) = $21,800.

Req. B Situation 2

Investment in Seles

Jan 1 Common stock of Seles Corp. Debit $77,520

Cash Credit $77,520

Note: As Windsor, Inc. obtained 30% of Martinez shares at $8, total cash has to be paid to Martinez Fashion = (32,300*30%) × $8 = 9,690 shares × $8 = $77,520.

Jun 15 Cash Debit $10,560

Dividend Revenue Credit $10,560

Note: As Seles declared $32,300 to all stockholders, Windsor, Inc. will receive 30% of those dividends as they acquired 30% of the total stocks. The cash received from the MF is = $32,300 × 30% = $10,560.

Investment in Seles

Dec 31 Cash Debit $24,600

Revenue Credit $24,600

Note: As Seles reported a net income of $82,000, due to acquiring 30% of Seles stock, Windsor, Inc. will receive 30% of its net income. The revenue is = $82,000 × 30% = $24,600.