Exercise NO: 23

Dan Aykroyd Corp. was a 30% owner of Steve Martin Company, holding 210,000 shares of Martin’s common stock on December 31, 2013. The investment accoun

Dan Aykroyd Corp. was a 30% owner of Steve Martin Company, holding 210,000 shares of Martin’s common stock on December 31, 2013. The investment account had the following entries.

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Investment in Martin

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1/1/12 Cost $3,180,000 12/6/12 Dividend received $150,000

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12/31/12 Share of income 390,000 12/5/13 Dividend received 240,000

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12/31/13 Share of income 510,000

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On January 2, 2014, Aykroyd sold 126,000 shares of Martin for $3,440,000, thereby losing its significant influence. During the year 2014, Martin experienced the following results of operations and paid the following dividends to Aykroyd.

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Martin Dividends Paid

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Income (Loss) to Aykroyd

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2014 $300,000 $50,400

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At December 31, 2014, the fair value of Martin shares held by Aykroyd is $1,570,000. This is the first reporting date since the January 2 sale.

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Instructions

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(a) What effect does the January 2, 2014, transaction have upon Aykroyd’s accounting treatment for its investment in Martin?

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(b) Compute the carrying amount of the investment in Martin as of December 31, 2014 (prior to any fair value adjustment).

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(c) Prepare the adjusting entry on December 31, 2014, applying the fair value method to Aykroyd’s long-term investment in Martin Company securities.

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