KLM purchased some shares of one of its suppliers, XYZ Co., asan investment. KLM paid $140,186 for the shares. Althoughmanagement plans to hold this investment for the long-term, thecompany may need to sell it in the future for liquidity purposes.Jack and Jim also think that making investments in some of theirother suppliers can be a good way to ensure quality and consistencyin the components they buy from these suppliers. Because many ofits suppliers are public companies, it should be fairly easy forKLM to buy shares on the open market.
Jack and Jim mention that they might go so far as to buy 10â15%of the common stock of one of their main suppliers and up to 30%-80% of the common stock of another supplier of routers, which are acritical piece in the KLM system. They want you to help themunderstand whether it makes a difference if they buy just 10â15% orif they buy 30%-80% of these suppliersâ shares. Both thesesuppliers have been around for a while, and with very fewexceptions, the parts ordered from them have been of high qualityand delivered on time; Jack and Jim tell you that if they do buythese stocks, they anticipate holding them for a long time.
Instructions
⢠Use the investment in XYZ Co. to illustratethe accounting and financial reporting implications of an equityinvestment in a supplier. While the growth prospects for XYZ arequite good, in the current year it reported a net loss of $120,000and paid cash dividends of $24,000. The fair value of the XYZshares is $150,000 at year-end. Prepare journal entries for the XYZinvestment, assuming:
1. KLMâs investment represents 10% of XYZ shares.
2. KLMâs investment represents 30% of XYZ shares.
3. KLMâs investment represents 80% of XYZ shares.
⢠Indicate the differential effect on income and balance sheetbetween the accounting for the conditions under assumptions 1,2 and3.
⢠Indicate Is it better for the company KLM toinvest 10% or 30% or 80% in short- time orlong time and why?
II. Jack and Jim have heard that as long as they do not holdmore than 20% of the shares of one of these suppliers, they areable to recognize the unrealized gains on these equity investmentsin income. Prepare a memorandum to Jack and Jim with references tothe authoritative literature on the accounting for equityinvestments of less than 20% ownership. Discuss otherfactors beyond the percentage of shares owned that should beconsidered in determining the accounting for investments ifthey hold at least 20% but less than or equal toor greater than 50% of the stock ofanother company.
Support your answer from FASBstatement(s), List all URL used and follow APA style.
Gide for part one solution
(a)
1. Stock investment in XYZ of 10% of the outstanding votingstock:
DR
CR
For investment 1, Is any effect on income statement or not
For investment 2, above, there would be any effect on net income.
Etcâ¦
KLM purchased some shares of one of its suppliers, XYZ Co., asan investment. KLM paid $140,186 for the shares. Althoughmanagement plans to hold this investment for the long-term, thecompany may need to sell it in the future for liquidity purposes.Jack and Jim also think that making investments in some of theirother suppliers can be a good way to ensure quality and consistencyin the components they buy from these suppliers. Because many ofits suppliers are public companies, it should be fairly easy forKLM to buy shares on the open market.
Jack and Jim mention that they might go so far as to buy 10â15%of the common stock of one of their main suppliers and up to 30%-80% of the common stock of another supplier of routers, which are acritical piece in the KLM system. They want you to help themunderstand whether it makes a difference if they buy just 10â15% orif they buy 30%-80% of these suppliersâ shares. Both thesesuppliers have been around for a while, and with very fewexceptions, the parts ordered from them have been of high qualityand delivered on time; Jack and Jim tell you that if they do buythese stocks, they anticipate holding them for a long time.
Instructions
⢠Use the investment in XYZ Co. to illustratethe accounting and financial reporting implications of an equityinvestment in a supplier. While the growth prospects for XYZ arequite good, in the current year it reported a net loss of $120,000and paid cash dividends of $24,000. The fair value of the XYZshares is $150,000 at year-end. Prepare journal entries for the XYZinvestment, assuming:
1. KLMâs investment represents 10% of XYZ shares.
2. KLMâs investment represents 30% of XYZ shares.
3. KLMâs investment represents 80% of XYZ shares.
⢠Indicate the differential effect on income and balance sheetbetween the accounting for the conditions under assumptions 1,2 and3.
⢠Indicate Is it better for the company KLM toinvest 10% or 30% or 80% in short- time orlong time and why?
II. Jack and Jim have heard that as long as they do not holdmore than 20% of the shares of one of these suppliers, they areable to recognize the unrealized gains on these equity investmentsin income. Prepare a memorandum to Jack and Jim with references tothe authoritative literature on the accounting for equityinvestments of less than 20% ownership. Discuss otherfactors beyond the percentage of shares owned that should beconsidered in determining the accounting for investments ifthey hold at least 20% but less than or equal toor greater than 50% of the stock ofanother company.
Support your answer from FASBstatement(s), List all URL used and follow APA style.
Gide for part one solution
(a)
1. Stock investment in XYZ of 10% of the outstanding votingstock:
DR | CR | |
For investment 1, Is any effect on income statement or not
For investment 2, above, there would be any effect on net income.
Etcâ¦
