Question

Journal Entries for Fair Value and Equity Methods) The following are two independent situations.

Situation 1: Conchita Cosmetics acquired 10% of the 200,000 shares of common stock of Martinez Fashion at a total cost of \(13 per

share on March 18, 2017. On June 30, Martinez declared and paid \)75,000 cash dividends to all stockholders. On December 31,

Martinez reported net income of \(122,000 for the year. At December 31, the market price of Martinez Fashion was \)15 per share.

Situation 2: Monica, Inc. obtained significant influence over Seles Corporation by buying 30% of Seles’s 30,000 outstanding shares

of common stock at a total cost of \(9 per share on January 1, 2017. On June 15, Seles declared and paid cash dividends of \)36,000

to all stockholders. On December 31, Seles reported a net income of $85,000 for the year.

Instructions

Prepare all necessary journal entries in 2017 for both situations.

Short answer

a.Conchita cosmetics share in the net income is $12,200.

b.Monica, Inc.’s share in the net income is $25,200

Step-by-step solution

Journal entry for the situation 1

2018	Particulars	Debit	Credit
March 18	Equity Investment	$260,000
	Cash		$260,000
	(Entry for the purchase of common stock)
June 30	Cash	$7,500
	Dividend Revenue		$7,500
	(Being entry of dividend received)
December 31	Fair Value Adjustment	$40,000
	Unrealized holding G/F - Loss		$40,000
	(Entry of fair value adjustment of shares)
December 31	Equity Investment	$12,200
	Investment Income		$12,200
	(Entry of net income adjustment)

Journal entry journal entry of situation 2

2018	Particulars	Debit	Credit
January 1	Equity Investment	$81,000
	Cash		$81,000
	(Entry for the purchase of common stock)
June 15	Cash	$10,800
	Dividend Revenue		$10,800
	(Being entry of dividend received)
December 31	Equity Investment	$25,500
	Investment Income		$25,500
	(Entry of adjustment of net income)