Exercise Session 9

(maximum 30 minutes)
Question A

True of False. If the answer is false, explain the right answer.

1. If investor holds the equity instrument less than 20%, the investor reports as revenue its share of
the net income reported by the investee.
2. Non-trading equity investments are recorded at fair value, with unrealized gains and losses
reported in other comprehensive income
3. Under the equity method, all dividends received by an investor from the investee decrease the
investment’s carrying value.

Question B

Answer the questions with your supporting calculations

Question 1

Korman Company has the following securities in its portfolio of trading equity investments on
December 31, 2021:
Cost Fair Value
5,000 ordinary shares of Thomas Corp. €155,000 €139,000
10,000 ordinary shares of Gant 182,000 190,000
€337,000 €329,000

All of the investments had been purchased in 2021. In 2022, Korman completed the following
investment transactions:
March 1 Sold 5,000 ordinary shares of Thomas Corp., @ €31 less fees of €1,500.
April 1 Bought 600 ordinary shares of Werth Stores, @ €45 plus fees of €550.

The Korman Company portfolio of trading equity investments appeared as follows on December
31, 2022:
Cost Fair Value
10,000 ordinary shares of Gant €182,000 €195,500
600 ordinary shares of Werth Stores 27,550 25,500
€209,550 €221,000

Instructions
Prepare the general journal entries for Korman Company for:
(a) the 2021 adjusting entry.
(b) the sale of the Thomas Corp. shares.
(c) the purchase of the Werth Stores' shares.
(d) the 2022 adjusting entry.

Question 2
Agee Corp. acquired a 25% interest in Trent Co. on January 1, 2022, for £500,000. Agee got significant
influence to Trent. At that time, Trent had 1,000,000 shares of its $1 par common stock issued and
outstanding. During 2022, Trent paid cash dividends of £160,000 and thereafter declared and issued a
5% ordinary share dividend when the fair value was £2 per share. Trent's net income for 2022 was
£360,000. What is the balance in Agee’s investment account at the end of 2022?

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