Bart Company had outstanding 30,000 shares of common stock

Question:

Bart Company had outstanding 30,000 shares of common stock, par value $10 per share. On January 1, 2010, Homer Company purchased some of these shares at $25 per share, with the intent of holding them for a long time. At the end of 2010, Bart Company reported the following: net income, $50,000, and cash dividends declared and paid during the year, $25,500. The market value of Bart Company stock at the end of 2010 was $22 per share.

Requirement 2:
Give the journal entries for Homer Company at the dates indicated for each of the two independent cases. If purchased Case A 3,600 shares and Case B 10,500 shares. (In cases where no entry is required, please select the option “No journal entry required” for your answer to grade correctly. Leave no cells blank – be certain to enter “0” wherever required. Omit the “$” sign in your response.)

Requirement 3:
Complete the following schedule to show the separate amounts that should be reported on the 2010 financial statements of Homer Company: (Leave no cells blank – be certain to enter “0” wherever required. Negative amount should be indicated by a minus sign. Omit the “$” sign in your response.)

Answer:

Requirement 2:

Case A
1/1/10 DR: Investment $90,000
CR: Cash 90,000
(to record purchase)
DR: Cash 3,060
CR: Investment revenue 3,060
(record dividend income)
DR: Unrealized gain (loss) 10,800
CR: Fair value adjustment 10,800
(fair value adjustment)
No adjustment for net income required

Case B
DR: Investment $262,500
CR: Cash 262,500
(to record purchase)
DR: Cash 8,925
CR: Investment 8,925
(record dividend income)
DR: Investment 17,500
CR: Investment revenue 17,500
(adjust for net income)
No fair value adjustment required

Requirement 3:

Case A
Income statement
Other income:
Interest/Dividend income 3,060
Other comprehensive income:
Unrealized gain (loss) (10,800)

Balance sheet
Noncurrent assets:
Securities, available-for-sale 79,200
Stockholder’s Equity:
Accumulated other comprehensive income (10,800)

Cash Flows
Operating: 3,060
Investing: (90,000)

Case B
Income statement
Other income:
Investment revenue 17,500

Balance sheet
Noncurrent assets:
Investment 271,075

Cash flows
Operating: 8,925
Investing: (262,500)

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