VPI, Inc. bought 20,000 shares (a 19% interest) of the voting stock of CBD, Inc. on 9/1 for $750,000 ($37.50/share). ABC, Inc. manufacturers high end jewelry and handbags and is headquartered in the same city as VPI, Inc. The companies don’t do business with each other, but because of their similarities, Virginia, who serves as the president of VPI, Inc., has become well acquainted with the management of ABC, Inc. Since VPI, Inc has less than a 20% interest in ABC, Inc, the accountants determined that VPI, Inc did not have significant influence over ABC, Inc. When Maggie did her review, she noted that Virginia currently sits on the board of ABC, Inc. and that no other investor in ABC, Inc. holds more than a 10% voting interest. This makes Maggie wonder whether VPI, Inc. has significant influence over ABC, Inc. ABC, Inc.’s stock was trading at $40/share on 12/31. ABC recorded net income of $1,871,576 for the current year and paid a $0.50/share dividend on 12/31 (date of record on the dividend was 9/15).

1. The accountants at VPI, Inc. made three entries related to this investment during the year/in preparation of the financial statements. What were those entries?

2. What entries would have been made if the accountants at VPI, Inc. had initially decided that VPI, Inc. had significant influence over ABC, Inc.?

3. If Maggie determines that VPI, Inc. does have significant influence over ABC, Inc., what entries would be necessary to adjust the accountants to the correct balances? (Note: Ignore any income tax effects.)

Answer rating: 100% (QA)

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