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Shan Shan Inc
Shan Shan Inc. acquired 20% of outstanding ordinary share of Cho Corporation on 31
December 2018. The purchase price was $ 125,000,000 for 50,000 shares. Cho Corp declared
and paid an $ 80 per share cash dividend on June 30 and on December 31 2019. Cho reported
net income of $ 73,000,000 for 2019. The fair value of Cho’s shares was $ 2,700 per share at
December 31 2019.
Instructions:
a. Prepare the journal entries for Shan Shan Inc. for 2018 and 2019, assuming that Shan
Shan cannot exercise significant influence over Cho. The investment should be
classified as trading
b. Prepare the journal entries for Shan Shan Inc. for 2018 and 2019, assuming that Shan
Shan can exercise significant influence over Cho
c. At what amount is the investment reported on the statement of financial position under
each of these methods at December 31, 2019? What is the total net income reported in
2019 under each of these methods?
Expert Solution
(a)
December 31, 2018
Equity Investments........................................... 125,000,000
Cash....................................................... 125,000,000
June 30, 2019
Cash.................................................................... 4,000,000
Dividend Revenue (50,000 X 80).......... 4,000,000
December 31, 2019
Cash..................................................................... 4,000,000
Dividend Revenue (50,000 X 80)........... 4,000,000
Securities Fair Value Adjustment........................ 10,000,000
Unrealized Holding Gain or Loss-
Income................................................................. 10,000,000
2,700 X 50,000 = 135,000,000
135,000,000 - 125,000,000 = 10,000,000
(b)
December 31, 2018
Equity Investments............................................ 125,000,000
Cash................................................................... 125,000,000
June 30, 2019
Cash..................................................................... 4,000,000
Equity Investments............................................... 4,000,000
December 31, 2019
Cash..................................................................... 4,000,000
Equity Investments............................................. 4,000,000
Equity Investments............................................. 14,600,000
Revenue from Investment
(20% X 73,000,000)............................................ 14,600,000
(c)
|
|
Fair Value Method |
Equity Method |
|
Investment amount (statement of financial position) |
135,000,000 |
*131,600,000* |
|
Dividend revenue (income statement) |
8,000,000 |
0 |
|
Unrealized holding gain (income statement) |
10,000,000 |
|
|
Revenue from investment (income statement) |
14,600,000 |
*125,000,000 + 14,600,000 - 4,000,000 - 4,000,000
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