nthg 15. On January 1, Polk Stores, Incorporated acquired 40% of Domino Shoe Company. Polk is acquiring the affiliate to secure a reliable source of supply. Polk acquired 198,000 shares of the 670,000 shares of the investee company at a cost of $2,535,000. At the time of acquisition, the book value of Domino's net assets equaled its market value. Domino reported $8,136,100 net income and declared and paid dividends of $2,287,000 at the end of the year of acquisition. Assume that Polk elected the fair value option on the date of acquisition. At the end of the year of acquisition, Domino's shares are trading for $15 per share. (Click the icon to view the journal entries recorded under the equity method.) Read the requirements. Requirement a. Prepare the journal entry required to record the acquisition of the investment in Domino Shoe. (Record debits first, then credits. Exclude explanations from any journal entries.) Account January 1, Current Year Equity Investment in Domino Shoe Company 2,535,000 Cash 2,535,000 Requirement b. Prepare the journal entry required to record the receipt of the cash dividends. (Record debits first, then credits. Exclude explanations from any journal entries.) Account December 31, Current Year (1) Cash (2) Dividend Income (3 Requirement c. Prepare the journal entry required to adjust the investment balance to fair value. (Record debits first, then credits. Exclude explanations from any journal entries.) Account December 31, Current Year 7 (8) Requirement d. Prepare an analysis comparing the pre-tax income and cash flows relating to the investment under the equity method and the fair value method. (Complete all answer boxes. Enter a "0" if there is no balance or if a balance does not apply to that method. Enter any losses or cash outflow amounts with a minus sign or parentheses.) Review the journal entries you prepared in Requirementa. Requirement b and Requirement c under the fair value option.3 Fair Value Equity Option Method Equity income Dividend income Fair value adjustment, unrealized gain (loss) Total income Cash Flows: Dividends received Cash outflow at purchase Net cash flow Requirement e. Prepare an analysis comparing the pre-tax income and cash flows relating to the investment under the equity method and the fair value method, assuming that Polk sold the investment for $5,900,000 on January 1 of the year after acquisition. First calculate cash flows relating to the investment under the equity and the fair value method assuming that Polk sold the investment for $5,900,000 on January 1 of the year after acquisition. (Complete all answer boxes. Enter a "0" if there is no balance or if a balance does not apply to that method. Use a minus sign or parentheses for any amounts to be subtracted.) Fair Value Equity Option Method Original cost Revenue from investment Dividends Carrying value Selling price Gain (loss) on sale of investment Income before sale Reversal of FV Adjustment Total income after sale Finally, calculate the pre-tax income. (Enter any cash outflow amounts with a minus sign or parentheses.) Fair Value Equity Option Method Total cash flow before sale Cash proceeds on sale of investment Pre-tax cash flows Journal Entries under Equity Method Account January 1, Current Year Investment in Domino Shoe Company (Equity method) 2,535,000 Cash 2,535,000 Account December 31, Current Year Investment in Domino Shoe Company (Equity method) 3,254,440 Income from Investment 3,254,440 Account December 31, Current Year Cash 914,800 Investment in Domino Shoe Company (Equity method) 914,800 2: Requirements Prepare the journal entry required to record the acquisition of the investment in Domino Shoe. a Prepare the journal entry required to record the receipt of the cash dividends b. Prepare the journal entry required to adjust the investment balance to fair value. C. d. Prepare an analysis comparing the pre-tax income and cash flows relating to the investment under the equity method and the fair value method. Prepare an analysis comparing the pre-tax income and cash flows relating to the investment under the equity method and the fair value method, assuming that Polk sold the investment for $5,900,000 on January 1 of the year after acquisition. 3: Journal Entries under Fair Value Method Account January 1, Current Year Equity Investment in Domino Shoe Company 2,535,000 Cash 2,535,000 Account December 31, Current Year Cash 914,800 Dividend Income 914,800 Account December 31, Current Year Fair Value Adjustment Fair Value Option 435,000 Unrealized Gain/Loss on Equity Investment-Fair Value Option (Net income) 435,000 nthg 15. On January 1, Polk Stores, Incorporated acquired 40% of Domino Shoe Company. Polk is acquiring the affiliate to secure a reliable source of supply. Polk acquired 198,000 shares of the 670,000 shares of the investee company at a cost of $2,535,000. At the time of acquisition, the book value of Domino's net assets equaled its market value. Domino reported $8,136,100 net income and declared and paid dividends of $2,287,000 at the end of the year of acquisition. Assume that Polk elected the fair value option on the date of acquisition. At the end of the year of acquisition, Domino's shares are trading for $15 per share. (Click the icon to view the journal entries recorded under the equity method.) Read the requirements. Requirement a. Prepare the journal entry required to record the acquisition of the investment in Domino Shoe. (Record debits first, then credits. Exclude explanations from any journal entries.) Account January 1, Current Year Equity Investment in Domino Shoe Company 2,535,000 Cash 2,535,000 Requirement b. Prepare the journal entry required to record the receipt of the cash dividends. (Record debits first, then credits. Exclude explanations from any journal entries.) Account December 31, Current Year (1) Cash (2) Dividend Income (3 Requirement c. Prepare the journal entry required to adjust the investment balance to fair value. (Record debits first, then credits. Exclude explanations from any journal entries.) Account December 31, Current Year 7 (8) Requirement d. Prepare an analysis comparing the pre-tax income and cash flows relating to the investment under the equity method and the fair value method. (Complete all answer boxes. Enter a "0" if there is no balance or if a balance does not apply to that method. Enter any losses or cash outflow amounts with a minus sign or parentheses.) Review the journal entries you prepared in Requirementa. Requirement b and Requirement c under the fair value option.3 Fair Value Equity Option Method Equity income Dividend income Fair value adjustment, unrealized gain (loss) Total income Cash Flows: Dividends received Cash outflow at purchase Net cash flow Requirement e. Prepare an analysis comparing the pre-tax income and cash flows relating to the investment under the equity method and the fair value method, assuming that Polk sold the investment for $5,900,000 on January 1 of the year after acquisition. First calculate cash flows relating to the investment under the equity and the fair value method assuming that Polk sold the investment for $5,900,000 on January 1 of the year after acquisition. (Complete all answer boxes. Enter a "0" if there is no balance or if a balance does not apply to that method. Use a minus sign or parentheses for any amounts to be subtracted.) Fair Value Equity Option Method Original cost Revenue from investment Dividends Carrying value Selling price Gain (loss) on sale of investment Income before sale Reversal of FV Adjustment Total income after sale Finally, calculate the pre-tax income. (Enter any cash outflow amounts with a minus sign or parentheses.) Fair Value Equity Option Method Total cash flow before sale Cash proceeds on sale of investment Pre-tax cash flows Journal Entries under Equity Method Account January 1, Current Year Investment in Domino Shoe Company (Equity method) 2,535,000 Cash 2,535,000 Account December 31, Current Year Investment in Domino Shoe Company (Equity method) 3,254,440 Income from Investment 3,254,440 Account December 31, Current Year Cash 914,800 Investment in Domino Shoe Company (Equity method) 914,800 2: Requirements Prepare the journal entry required to record the acquisition of the investment in Domino Shoe. a Prepare the journal entry required to record the receipt of the cash dividends b. Prepare the journal entry required to adjust the investment balance to fair value. C. d. Prepare an analysis comparing the pre-tax income and cash flows relating to the investment under the equity method and the fair value method. Prepare an analysis comparing the pre-tax income and cash flows relating to the investment under the equity method and the fair value method, assuming that Polk sold the investment for $5,900,000 on January 1 of the year after acquisition. 3: Journal Entries under Fair Value Method Account January 1, Current Year Equity Investment in Domino Shoe Company 2,535,000 Cash 2,535,000 Account December 31, Current Year Cash 914,800 Dividend Income 914,800 Account December 31, Current Year Fair Value Adjustment Fair Value Option 435,000 Unrealized Gain/Loss on Equity Investment-Fair Value Option (Net income) 435,000
