Asked by Edgar Quinones on May 03, 2024
Verified
Posthorn Corporation acquired 20,000 of the 100,000 outstanding common shares of Stamp Company on January 1, 2019, for a cash consideration of $200,000. During 2019, Stamp Company had net income of $120,000 and paid dividends of $80,000. At the end of 2019, shares of Stamp Company were trading for $11 each. Posthorn has a December 31 year end for all years.
During 2020, Stamp Company had a loss of $60,000 and paid dividends of $40,000. Income for the first half of the year was $80,000 and the loss in the second half of the year was $140,000. The dividends were paid on June 30. On July 2, 2020, Posthorn Corporation sold 5,000 shares of Stamp Company for a consideration of $12 per share. At the end of 2020, the share price of Stamp Company had fallen to $6 per share. The average of market analysts' forecasts was that the share price could be expected to rise to $8 per share over the next five years. (Assume that the future recoverable value of the shares is assessed to be $8 per share.)
Required:
Provide journal entries for Posthorn Corporation for all transactions relating to its investment in Stamp Company for the year 2020 if it accounts for its investment in Stamp Company as a fair value through profit and loss investment (FVTPL).
Fair Value Through Profit or Loss
A financial reporting approach where assets and liabilities are revaluated at current market prices, with changes affecting the income statement.
Share Price
The current price at which a share of stock can be bought or sold.
- Recognize the nuances distinguishing investments managed by the equity method from those managed under the provisions of Fair Value Through Profit or Loss and Fair Value Through Other Comprehensive Income.
- Compute and document profit or loss from the disposal of stock investments.
- Ascertain the proper occasions and procedures for entering records of investments revalued to reflect fair value.
Verified Answer
JD
Jagdeep DhaliwalMay 03, 2024
Final Answer :
June 30,2020 Cash $8,000 Dividend income $8,000 To record dividend paid on June 30,2020) July 2,2020 Cash $60,000 Investment in Stamp Company $55,000 Gain on sale of investment 5,000 (To record sale of shares on July 2, 2020; carrying value was $11 per share) Dec 31,2020 Investment revaluation loss (FVTPL) $75,000 Investment in Stamp Company $75,000 (To revalue investment to fair value at year-end- (15,000×$6)−(15,000×$11)\begin{array}{|l|l|r|r|}\hline \text { June } 30,2020 & \text { Cash } & \$ 8,000 & \\\hline & \text { Dividend income } & & \$ 8,000 \\\hline & \text { To record dividend paid on June 30,2020) } & & \\\hline \text { July } 2,2020 & \text { Cash } & \$ 60,000 & \\\hline & \text { Investment in Stamp Company } & & \$ 55,000 \\\hline& \text { Gain on sale of investment } & & 5,000 \\\hline& \begin{array}{l}\text { (To record sale of shares on July 2, 2020; carrying } \\\text { value was } \$ 11 \text { per share) }\end{array} & & \\\hline \text { Dec 31,2020 } & \text { Investment revaluation loss (FVTPL) } & \$ 75,000 \\\hline & \text { Investment in Stamp Company } & & \$ 75,000 \\\hline &\text { (To revalue investment to fair value at year-end- } & & \\&(15,000 \times \$ 6)-(15,000 \times \$ 11) & &\\\hline\end{array} June 30,2020 July 2,2020 Dec 31,2020 Cash Dividend income To record dividend paid on June 30,2020) Cash Investment in Stamp Company Gain on sale of investment (To record sale of shares on July 2, 2020; carrying value was $11 per share) Investment revaluation loss (FVTPL) Investment in Stamp Company (To revalue investment to fair value at year-end- (15,000×$6)−(15,000×$11)$8,000$60,000$75,000$8,000$55,0005,000$75,000
Learning Objectives
- Recognize the nuances distinguishing investments managed by the equity method from those managed under the provisions of Fair Value Through Profit or Loss and Fair Value Through Other Comprehensive Income.
- Compute and document profit or loss from the disposal of stock investments.
- Ascertain the proper occasions and procedures for entering records of investments revalued to reflect fair value.