Long-Term Investment - FV-NI Method

question 84

Essay

Long-term investment - FV-NI method
Ceres Corporation is considering making a significant long-term investment in Pisces Ltd., a young and very promising company. Ceres decides to make a smaller investment first, and if Pisces turns out to be successful, Ceres intends to make an additional investment to reach significant influence. Pisces has 200,000 shares authorized, and 110,000 shares outstanding.
On January 1, 2020, Pisces issues Ceres 10,000 shares for $ 400,000 in cash (so now there are 120,000 shares outstanding).
Additional information:
1. On November 1, 2020, Pisces declares a total cash dividend of $ 180,000.
2. Pisces reports $ 225,000 net income for 2020. Its stock price on December 31, 2020 is $ 38.
3. On November 1, 2021, Pisces announces a total dividend of $ 270,000 to be paid on January 2, 2022.
4. Pisces reports $ 360,000 net income for 2021. Its stock price on December 31, 2021 is $ 44.
5. On March 15, 2022, Ceres is approached by an investment fund which offers to buy all their Pisces shares for $ 55 per share, a 25% premium over the current stock price of $ 44. Ceres accepts the offer and sells the shares on that day.
Instructions
Assuming Ceres uses the fair value through net income model (FV-NI) to account for this investment:
a) Prepare the journal entries in Ceres's books for the 2020 calendar year.
b) Prepare the journal entries in Ceres's books for the 2021 calendar year.
c) Prepare the journal entries in Ceres's books for the 2022 calendar year.

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