Over the years, Chong has had a policy of investing idle cash in equity instruments of other companies. In particular, Chong has made periodic investments in the company's main supplier, Kune Industries Limited. Although Chong currently owns 19% of the outstanding common shares of Kune, it does not yet have significant influence over the operations of this investee company. Chong accounts for its investment inKune using FV-OCI without recycling through net income. 

1. In 2020, Chong acquired shares of Yuan Inc. Corp. and Isha Electric Ltd. for short-term trading purposes(FV-NI). Chong purchased 100,000 shares of Yuan Inc. for $1.4 million, and the shares currently have a fair value of $1.6 million. Chong's investment in Isha Electric has not been profitable: the company acquired 50,000 shares of Isha at $20 per share and they currently have a fair value of $720,000. 

2. Before 2020, Chong had invested $22.5 million in Kune Industries and, at December 31, 2019, the investment had a fair value of $21.5 million. While Chong did not sell or purchase any Kune shares this year, Kune declared and paid a dividend totalling $2.4 million on all of its common shares, and reported 2020 net income of $13.8 million. Chong's 19% ownership of Kune Industries has a December 31, 2020 fair value of $22,225,000

Instructions 

a. Prepare the appropriate adjusting entries for Chong as at December 31, 2020. 

b. For both categories of investments, describe how the results of the valuation adjustments made in part (a) would appear in Chong's 2020 I/S and B/S. Ignore income taxes. 

c. Prepare the dividend and adjusting entries for the 19% Kune investment, assuming that Chong's 19% interest results in significant influence over Kune's activities (Equity Method).

Answer rating: 100% (QA)

a Appropriate adjusting entries Particulars Debit Credit Stock investment account Cash account made ... View the full answer