Question

Teal Inc. acquired 20% of the outstanding common stock of Theresa Kulikowski Inc. on December 31, 2020. The purchase price was $1,111,200 for 46,300 shares. Kulikowski Inc. declared and paid an $0.80 per share cash dividend on June 30 and on December 31, 2021. Kulikowski reported net income of $788,000 for 2021. The fair value of Kulikowski’s stock was $27 per share at December 31, 2021. Assume that the security is a trading security.

Prepare the journal entries for Teal Inc. for 2020 and 2021, assuming that Phelps cannot exercise significant influence over Kulikowski. The securities should be classified as available-for-sale.

Answer 1

Answer and Explanation:

The Journal entry is shown below:-

1. Equity investment Dr, $1,111,200

To Cash $1,111,200

(Being the investment is recorded)

2. Cash Dr, $37,040

(46,300 × $0.80)

To Dividend revenue $37,040

(Being Dividend revenue is recorded)

3. Cash Dr, $37,040

(46,300 × $0.80)

To Dividend revenue $37,040

(Being Dividend revenue is recorded)

4. Fair Value Adjustment Dr, $1,111,200

(46,300 × $27) - $1,111,200

To Fair Value Adjustment $1,111,200

(Being fair value is recorded)