Using the information provided in E16- 12, assume that Douglas elected the fair value option on the date of acquisition. At the end of the year of acquisition, Kirk’s shares are trading for $ 18 per share.
In E16-12
On January 1, Douglas Stores, Incorporated acquired 30% of Kirk Shoe Company. Douglas is acquiring the affiliate to secure a reliable source of supply. Douglas acquired 195,000 shares of the 650,000 shares of the investee company at a cost of $ 2,540,000. At the time of acquisition, the book value of Kirk’s net assets equaled its market value. Kirk reported $ 8,136,700 net income and declared and paid dividends of $ 2,275,000 at the end of the year of acquisition.
Required
a. Prepare the journal entry required to record the acquisition of the investment in Kirk Shoe.
b. Prepare the journal entry required to record the receipt of the cash dividends.
c. Prepare the journal entry required to adjust the investment balance to fair value.
d. Prepare an analysis comparing the pre- tax income and cash flows relating to the investment under the equity method and the fair value method.
e. Prepare an analysis comparing the pre- tax income and cash flows relating to the investment under the equity method and the fair value method, assuming that Douglas sold the investment for $ 5,000,000 on January 1 of the year after acquisition.