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. Show the appropriate journal entries for each transaction, including computations if necessary. Prepare the relevant portions of each year's balance sheet and income statement reflecting these transactions for both 2015 and 2016. Account for the investment in Packard using the equity method, and the investments in AT&T, Apple, and Coca Cola as available-for-sale securities. Include dividend earnings, sale transactions, changes in market value, and investment account adjustments as applicable.

Paper For Above instruction

Brown Co engaged in multiple long-term investment transactions during 2015 and 2016. These transactions involve equity and debt securities, requiring specific journal entries, adjustments, and reporting treatments. This paper will systematically analyze each transaction, providing journal entries, and constructing key financial statements for both years, reflecting the effects of these investments.

2015 Transactions and Accounting

On January 1, 2015, Brown Co purchased 1,000 shares of Packard, Inc. for $80,000, representing a 30% ownership stake. Since Brown owns a significant influence, the investment is accounted for using the equity method. The initial journal entry recognizes the investment and establishes the equity method basis:

Dr. Investment in Packard  $80,000
Cr. Cash                $80,000

On October 2, Brown purchases 2,000 shares of AT&T for $60,000, representing less than 1% ownership. This is classified as an available-for-sale security:

Dr. Investment in AT&T  $60,000
Cr. Cash                $60,000

On October 17, Brown acquires 1,000 shares of Apple for $40,000, also less than 1% ownership, classified as an available-for-sale security:

Dr. Investment in Apple  $40,000
Cr. Cash                 $40,000

Dividends received during 2015 are recorded as reductions in the investment for the available-for-sale securities, and as income (for the equity-method investment):

- On November 1, dividend from Packard of $5,000:

Dr. Cash                  $5,000
Cr. Investment in Packard   $5,000

- On November 30, dividend from AT&T of $3,000:

Dr. Cash                   $3,000
Cr. Investment in AT&T    $3,000

- On December 15, dividend from Apple of $1,400:

Dr. Cash                   $1,400
Cr. Investment in Apple  $1,400

At year-end, investment in Packard is adjusted for its net income, which impacts the equity investment account—assuming the entire net income ($70,000) is attributable to Brown (since Brown has a significant influence). The proportionate share of net income is 30%, or $21,000:

Dr. Investment in Packard  $21,000
Cr. Equity in Earnings of Packard  $21,000

Market values at December 31 are provided as: Packard - $84,000; AT&T - $48,000; Apple - $45,000. For available-for-sale securities, adjustments are made to fair value through Other Comprehensive Income. The fair value adjustment for each is calculated as the difference between market value and book value, then adjusted accordingly:

• AT&T: Market $48,000 - Book $60,000 = -$12,000 adjustment
• Apple: Market $45,000 - Book $40,000 = +$5,000 adjustment

Book value for AT&T (initial $60,000, less dividends $3,000) is $57,000, but since for available-for-sale, adjustments are to fair value directly, the adjustment of $12,000 decreases the asset value, and is recorded as follows:

Dr. Unrealized Loss on AFS Securities  $12,000
Cr. Fair Value Adjustment - AFS   $12,000

Similarly, for Apple, the increase of $5,000 is recorded:

Dr. Fair Value Adjustment - AFS    $5,000
Cr. Unrealized Gain on AFS Securities  $5,000

At the end of 2015, the balance sheet includes the investments at fair value and the equity method investment adjusted for the earnings. The income statement reflects the dividend income ($5,000 + $3,000 + $1,400), and the equity income from Packard ($21,000).

2016 Transactions and Accounting

On January 1, 2016, Brown Co sold its Packard shares for $108,000, resulting in a gain based on the book value of the investment at year-end 2015. The sale journal entry is:

Dr. Cash                  $108,000
Cr. Investment in Packard  (Book value at sale date)
Cr. Gain on Sale of Investment  (difference)

Assuming the book value of the Packard investment includes the original cost, the accumulated equity earnings, and adjustments, this calculation must be precise but typically involves the original cost minus dividends plus proportional net income. The net income for 2015 was $70,000, with Brown's share $21,000.

From May 30 and June 15, Brown received dividends from AT&T ($3,100) and Apple ($1,600), respectively, which are recorded as reductions of the respective investment balances:

Dr. Cash                  $3,100
Cr. Investment in AT&T  $3,100
Dr. Cash                  $1,600
Cr. Investment in Apple  $1,600

On August 17, Brown sells AT&T shares for $52,000, recognizing a gain or loss based on the book value. The entry is:

Dr. Cash                  $52,000
Cr. Investment in AT&T
Cr./Dr. Gain or Loss on Sale

On August 19, Brown purchases 2,000 shares of Coca-Cola for $50,000, less than 5% ownership, classified as an available-for-sale security:

Dr. Investment in Coca-Cola  $50,000
Cr. Cash                  $50,000

Dividends received in 2016 are recorded as reductions in the investments in available-for-sale securities:

Dr. Cash                  $1,800
Cr. Investment in Apple  $1,800

Year-end market values are $39,000 for Apple and $48,000 for Coca Cola. Adjustments are made accordingly:

• Apple: Market value $39,000 - Book Value (excluding previous adjustments) — adjustment needed
• Coca-Cola: $48,000—adjustments based on the book value.

The investment accounts are adjusted to reflect fair value, and unrealized gains/losses are recorded in Other Comprehensive Income as per available-for-sale securities accounting standards.

Additional net income and investment adjustments are recorded through the year, and the year-end balances are used to prepare the 2016 balance sheet and income statement. The stock's market value increases or decreases impact the valuation, but not the reported earnings unless realized through sale. The retained earnings and common stock balances are adjusted during the year for net income and dividends, as provided.

Financial Statement Presentation

The balance sheets for 2015 and 2016 show investments at fair value (available-for-sale) and the equity method investment in Packard. The income statements show dividend income, realized gains/losses, and income from equity method investments. The comprehensive income includes unrealized gains and losses on available-for-sale securities.

References

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