Question

On January 1, 2013, Plano Company acquired 8 percent (16,000 shares) of the outstanding voting shares of the Sumter Company for $192,000, an amount equal to Sumter’s underlying book and fair value. Sumter declares and pays a cash dividend to its stockholders each year of $100,000 on September 15. Sumter reported net income of $300,000 in 2013, $360,000 in 2014, $400,000 in 2015, and $380,000 in 2016. Each income figure can be assumed to have been earned evenly throughout its respective year. In addition, the fair value of these 16,000 shares was indeterminate, and therefore the investment account remained at cost.

On January 1, 2015, Plano purchased an additional 32 percent (64,000 shares) of Sumter for $965,750 in cash and began to use the equity method. This price represented a $50,550 payment in excess of the book value of Sumter’s underlying net assets. Plano was willing to make this extra payment because of a recently developed patent held by Sumter with a 15-year remaining life. All other assets were considered appropriately valued on Sumter’s books.

On July 1, 2016, Plano sold 10 percent (20,000 shares) of Sumter’s outstanding shares for $425,000 in cash. Although it sold this interest, Plano maintained the ability to significantly influence Sumter’s decision-making process. Assume that Plano uses a weighted average costing system.

Prepare the journal entries for Plano for the years of 2013 through 2016

Answer 1

Journal Entries of Plano For the Year 2013 to 2016

Date Particulars Debit Credit

2013

Jan1 Share of Sumter Company A/c Dr $192000

To Bank A/c $192000

(8% share of sumter company purchase by plano company)

Sep 15 Bank A/c Dr $8000

To Dividend A/c $8000

( Dividend being 8% of $ 100000)

2014

Sep 15 Bank A/c Dr $8000

To Dividend A/c $8000

( Dividend being 8% of $ 100000)

2015

Jan1 Share of Sumter Company A/c Dr $965750

To Bank A/c $965750

(32% share of sumter company purchase by plano company)

Sep 15 Bank A/c Dr $40000

To Dividend A/c $40000

( Dividend being 32+8% of $ 100000)

2016

June1 Bank A/c Dr $ 425000

To Share of Sumter co. $289400

To Capital Reserve A/c $135600

cost calculation through weighted average method

8% 16000 = $192000

32% 64000 = $965750

----------------------------------------

40% 80000 = $1157750

WAC Per share =1157750/80000 =$14.47 Per share

sold 20000 share = 14.47*20000= $289400