Koala Had the Following Transactions Relating to Its Investments During

question 131

Essay

Koala had the following transactions relating to its investments during 2020. Koala uses the effective interest method of amortization of premiums or discounts when applicable.
a. On July 1, 2020, Koala acquired a $400,000, 16%, 8-year government bond with interest paid semi-annually on January 1 and July 1. Because the market rate of interest was 12% on that date, Koala paid $480,847 for the bond. The bonds were classified as at amortized cost by Koala and had a fair value of $440,000 plus accrued interest on December 31, 2020.
b. On July 1, 2020, Koala acquired 10,000 shares of Gorilla at a price of $41 per share. On December 31, 2020, the ex-dividend date, dividends of $2.00 per share were declared with an expected date of payment of January 15, 2021. On December 31, 2020, the fair value of the Gorilla shares had increased to $42 per share. Management irrevocably elect to classify the investment at fair value through OCI.
c. On July 1, 2020, Koala acquired 45,000 shares (20%)of the outstanding shares of Black Bear at a price of $15 per share, giving it significant influence over Black Bear. Black Bear had net income of $600,000 for the six months ended December 31, 2020 and declared and paid total dividends of $10,000 to its shareholders on December 31, 2020. On December 31, 2020, Black Bear's shares had a fair value of $19 per share.
Required:
Provide all journal entries required relating to these investments on July 1, 2020 and December 31, 2020, including any journal entries required relating to the change in fair value for the year.

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Definitions:

Separable

Capable of being divided or detached from a larger entity or group, often relating to assets that can be sold, transferred, or dissected from an organization.

Post-acquisition

The period following the acquisition of a subsidiary or business unit, during which the acquired company's assets, liabilities, and operations are integrated and reflected in the parent company's financial statements.

Pre-acquisition

The phase before the acquisition of one company by another, during which due diligence, valuation, and negotiations occur.

Consolidation Adjustments

Adjustments made in the preparation of consolidated financial statements to eliminate intercompany transactions and balances among the parent and its subsidiaries.