Question

Accounting for equity investments

Strategic Investments completed the following investment transactions during 2018:

Jan. 14 Purchased 800 shares of Phyflexon stock, paying \(50 per share. The investment represents 4% ownership in Phyflexon’s voting stock. Strategic does not have significant influence over Phyflexon. Strategic intends to hold the investment for the indefinite future.

Aug. 22 Received a cash dividend of \)0.24 per share on the Phyflexon stock.

Dec. 31 Adjusted the investment to its current market value of \(45 per share.

31 Phyflexon reported net income of \)330,000 for the year ended 2018.

Requirements

1. Journalize Strategic’s investment transactions. Explanations are not required.

Short answer

Both sides of the journal totals$44,192.

Step-by-step solution

Definition of Cost Method

The method used for reporting the investment made in another company which is less than 20% of the totalvoting stock of the investee is known as the cost method.

Journal Entries

Date	Accounts and Explanation	Debit $	Credit $
14 Jan 2018	Equity investment	$40,000
	Cash		$40,000
22 Aug 2018	Cash	$192
	Dividend revenue		$192
31 Dec 2018	Unrealized holding loss	$4,000
	Fair value adjustment		$4,000
31 Dec 2018	No Journal entry is made for undistributed net income
		$44,192	$44,192