The Following Transactions And Information Pertain To Brown
The Following Transactions And Information Pertain To Brown Co Long Te
The following transactions and information pertain to Brown Co long-term investments during 2015 and 2016. Brown did not own any long-term investments prior to 2015. Show the appropriate journal entries for each transaction in good form (show your computations if you need to calculate a number for the journal entry). Show the relevant portions of each year’s balance sheet and income statement that reflect these transactions for both 2015 and 2016.
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Analysis and Reporting of Brown Co's Long-term Investments in 2015 and 2016
Brown Co engaged in multiple investment activities across 2015 and 2016 involving purchases, sales, dividends, and fair value adjustments of various securities. The accounting treatment differs based on the nature of each investment—whether it is accounted for under the equity method or as available-for-sale securities. This paper aims to detail the appropriate journal entries, prepare adjusted financial statements for both years, and analyze the effects of these investments on Brown Co’s financial position and performance.
2015 Investment Transactions and Their Accounting Treatment
On January 1, 2015, Brown Co purchased 1,000 shares of Packard, Inc. at $80,000, representing a 30% ownership stake. This significant ownership level warrants the use of the equity method, which reflects Brown Co's influence on Packard’s operations. The subsequent transactions involve dividends and earnings recognition, as well as fair value adjustments at year-end.
On October 2, Brown purchased 2,000 shares of AT&T at $60,000, which is less than 1% ownership, thus classified as an available-for-sale security. The same classification applies to the 1,000 Apple shares purchased on October 17 for $40,000. The investments in AT&T and Apple are recorded at cost initially and subsequently adjusted for dividend income, fair value changes, and realized gains/losses upon sale.
Dividends received are treated as income for available-for-sale securities, with fair value adjustments recognized through other comprehensive income (OCI). The sale of Packard shares and the subsequent fair value assessments at December 31 impact the accounting for these securities.
2015 Journal Entries
| Date | Account | Debit | Credit |
|---|---|---|---|
| Jan 1 | Investment in Packard (equity method) | $80,000 | |
| Cash | $80,000 | ||
| Oct 2 | Investment in AT&T (Available-for-sale) | $60,000 | |
| Cash | $60,000 | ||
| Oct 17 | Investment in Apple (Available-for-sale) | $40,000 | |
| Cash | $40,000 | ||
| Nov 1 | Cash | $5,000 | |
| Dividend Income (Packard) | $5,000 | ||
| Nov 30 | Cash | $3,000 | |
| Dividend Income (AT&T) | $3,000 | ||
| Dec 15 | Cash | $1,400 | |
| Dividend Income (Apple) | $1,400 | ||
| Dec 31 | Fair Value Adjustment - Packard | $4,000 | |
| Unrealized Gain on Investments | $4,000 | ||
| Dec 31 | Market Value Adjustment for AT&T | ($12,000) | |
| Unrealized Loss on Investments | $12,000 | ||
| Dec 31 | Market Value Adjustment for Apple | ($4,600) | |
| Unrealized Loss on Investments | $4,600 | ||
| Dec 31 | Investment in Packard | $4,000 | |
| Unrealized Gain on Investment | $4,000 | ||
| Dec 31 | Investment in AT&T | ($12,000) | |
| Unrealized Loss on Investment | $12,000 | ||
| Dec 31 | Investment in Apple | ($4,600) | |
| Unrealized Loss on Investment | $4,600 | ||
| Dec 31 | Gain on Sale of Packard Shares | $28,000 | |
| Cash | $108,000 |
2015 Income Recognition & Closing Entries
Under the equity method, Brown recognizes its share of Packard’s net income: 30% of $70,000 = $21,000. It also recognizes the dividends received, which reduce the investment account, as dividends are considered return of investment rather than income.
| Date | Account | Debit | Credit |
|---|---|---|---|
| Dec 31 | Investment in Packard | $21,000 | |
| Income from Investment in Packard | $21,000 | ||
| Nov 1 | Dividends Receivable or Cash | $5,000 | |
| Investment in Packard | $5,000 |
2015 Year-End Financial Position
At December 31, 2015, the balance sheet reflects the investments at fair value (for available-for-sale) and the adjusted book values for the equity method investment. The fair value adjustments are recorded in accumulated other comprehensive income (OCI). The income statement includes the dividends received and unrealized gains/losses from fair value changes, along with the income from the equity method.
Balance Sheet (2015)
- Cash and Cash Equivalents
- Investments:
- Packard (equity method): Cost + share of income - dividends
- AT&T (available-for-sale): at fair value, adjusted for unrealized gains/losses
- Apple (available-for-sale): at fair value, adjusted accordingly
- Other Assets and Liabilities
- Shareholders’ Equity: reflecting retained earnings including net income adjustments
Income Statement (2015)
- Investment Income from Packard: $21,000
- Dividend Income: $5,000 (Packard) + $3,000 (AT&T) + $1,400 (Apple) = $9,400
- Unrealized Gains/Losses on Investments (net of tax)
2016 Transactions and Their Accounting Treatment
In 2016, Brown sold Packard shares for $108,000 cash, realizing a gain. The sale involves removing the investment from books and recording any resulting gain. The company received dividends from AT&T and Apple, which are recognized as dividend income. The purchase of Coca Cola shares for $50,000, less than 5% ownership, qualifies as an available-for-sale security. Year-end fair value adjustments are made accordingly.
2016 Journal Entries
| Date | Account | Debit | Credit |
|---|---|---|---|
| Jan 1 | Cash | $108,000 | |
| Investment in Packard | $80,000 (initial cost) + $21,000 (income) - $5,000 (dividends received) = $96,000, then realized gain is calculated during sale | ||
| Aug 17 | Cash | $52,000 | |
| Investment in AT&T | $60,000 (initial) + $3,100 (dividends) - sale proceeds ($52,000) for the part sold; adjustments for fair value are at year-end | ||
| Dec 15 | Cash | $1,800 | |
| Dividend Income (Apple) | $1,800 | ||
| Dec 19 | Investment in Coca Cola | $50,000 | |
| Cash | $50,000 |
2016 Income Recognition & Final Valuations
Dividend income from AT&T and Apple, and the fair value adjustments for available-for-sale securities, are recognized accordingly. The sale of Packard shares results in a realized gain or loss, calculated as sale proceeds minus book value at sale date. The purchase of Coca Cola shares increases the investment account and will be adjusted at year-end for fair value changes.
2016 Year-End Financial Position
At December 31, 2016, investments are reported at fair value, with unrealized gains or losses affecting OCI. The investment in Packard is eliminated from the books following its sale and gain realization. The balance sheet now reflects investments in AT&T, Apple, and Coca Cola at their respective fair values.
The income statement includes dividend income received, realized gains from sale, and unrealized gains/losses on available-for-sale securities.
Conclusion
Brown Co's investment activities during 2015 and 2016 require careful accounting treatment based on ownership stake and intent. The equity method applies to the significant investment in Packard due to its influence, while available-for-sale classification suits the minority holdings in AT&T, Apple, and Coca Cola. Accurate recording of dividends, fair value adjustments, and gains/losses from sales ensures transparent reflection of investment performance in financial statements. These transactions significantly impact Brown Co’s assets, equity, and net income, emphasizing the importance of rigorous application of accounting standards for investments.
References
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