Question

Dan Aykroyd Corp. was a 30% owner of Steve Martin Company, holding 210,000 shares of Martin’s common stock on December 31, 2016. The investment account had the following entries.

Investment in Martin

1/1/15 Cost \(3,180,000 12/6/15 Dividend received \)150,000

12/31/15 Share of income 390,000 12/5/16 Dividend received 240,000

12/31/16 Share of income 510,000

On January 2, 2017, Aykroyd sold 126,000 shares of Martin for \(3,440,000, thereby losing its significant influence. During the year 2017, Martin experienced the following results of operations and paid the following dividends to Aykroyd.

Martin Dividends Paid Income (Loss) to Aykroyd 2017 \)300,000 \(50,400

At December 31, 2017, the fair value of Martin shares held by Aykroyd is \)1,570,000. This is the first reporting date since the January 2 sale.

Instructions (a) What effect does the January 2, 2017, transaction have upon Aykroyd’s accounting treatment for its investment in Martin?

(b) Compute the carrying amount of the investment in Martin as of December 31, 2017 (prior to any fair value adjustment).

(c) Prepare the adjusting entry on December 31, 2017, applying the fair value method to Aykroyd’s long-term investment in Martin Company securities.

Short answer

The effect will be the change of the method for accounting of investments, and the Carrying amount will be $2,229,600, and the journal entry will be passed for the adjustment

Step-by-step solution

Effect of January 2, 2017 transaction

The company will lose the significant rights of the company’s shares, which will make the company change the recording method from equity to the fair value method.

Computation of carrying amount of investment

	Amount ($)
Cost	3,180,000
Share of Income 12/31/2015	390,000
Share of Income 12/31/2016	530,000
	4,100,000
Dividends Received on 12/6/2015	150,000
Dividends received on 12/5/2015	240,000
Investment value as of 31/12/2016 for 210,000	3,710,000
The investment value for 126,000 shares	2,226,000
Investment Value as on 01/01/2017	2,226,000
Add: profit for the year 2017 300000*18%	54,000
	2,280,000
Less: Dividends received	-50,400
Carrying amount as of December 31, 2017	2,229,600

Adjusting journal entry

Date	Particulars	Debit ($)	Credit ($)
	Investment In securities	659,600
	Capital Reserve		659,600
	(Being adjusting entry recorded)