Daffitar Inc. produces and sells theater set designs and costumes. The company began operations on January

Daffitar Inc. produces and sells theater set designs and costumes. The company began operations on January 1, 2014. The following transactions relate to securities acquired by Daffitar Inc., which has a fiscal year ending on December 31:


2014
Feb. 1. Purchased 12,000 shares of Acuity Inc. as an available-for-sale security at $27 per share, including the brokerage commission.

Mar. 18. Received a cash dividend of $0.18 per share on Acuity Inc. stock.

Sept.12. A cash dividend of $0.24 per share was received on the Acuity stock.

28. Sold 1,000 shares of Acuity Inc. stock at $21 per share, less a brokerage commission of $50.

Dec. 31. Acuity Inc. is classified as an available-for-sale investment and is adjusted to a fair value of $33 per share. Use the valuation allowance for available-for-sale investments account in making the adjustment.


2015
Jan. 23. Purchased an influential interest in Shouse Inc. for $376,000 by purchasing 70,000 shares directly from the estate of the founder of Shouse Inc. There are 250,000 shares of Shouse Inc. stock outstanding.

Mar. 16. Received a cash dividend of $0.24 per share on Acuity Inc. stock.

Sept.16. Received a cash dividend of $0.24 per share plus an extra dividend of $0.06 per share on Acuity Inc. stock.

Dec. 31. Received $30,100 of cash dividends on Shouse Inc. stock. Shouse Inc. reported net income of $190,000 in 2015. Daffitar Inc. uses the equity method of accounting for its investment in Shouse Inc.

31. Acuity Inc. is classified as an available-for-sale investment and is adjusted to a fair value of $30 per share. Use the valuation allowance for available-for sale investments account in making the adjustment for the decrease in fair value from $33 to $30 per share.

Instructions

1. Journalize the entries to record these transactions.

2. Prepare the investment-related asset and stockholders’ equity balance sheet presentation for Daffitar Inc. on December 31, 2015, assuming the Retained Earnings balance on December 31, 2015, is $465,000.


Answer:


1.

2014
Feb. 1 Investments—Acuity Inc.* 324,000
Cash 324,000
*12,000 shares × $27 per share
Mar. 18 Cash* 2,160
Dividend Revenue 2,160
*12,000 shares × $0.18 per share
Sept. 12 Cash* 2,880
Dividend Revenue 2,880
*12,000 shares × $0.24 per share
28 Cash* 20,950
Loss on Sale of Investments 6,050
Investments—Acuity Inc.** 27,000
*(1,000 shares × $21.00) – $50
**1,000 shares × $27 per share
Dec. 31 Valuation Allowance for Available-forSale
Investments 66,000
Unrealized Gain (Loss) on Available-forSale
Investments 66,000
11,000 shares × ($33.00 – $27.00).
2015
Jan. 23 Investment in Shouse Inc. Stock 376,000
Cash 376,000
Mar. 16 Cash* 2,640
Dividend Revenue 2,640
*(12,000 shares – 1,000 shares) × $0.24 per share
Sept. 16 Cash* 3,300
Dividend Revenue 3,300
*11,000 shares × ($0.24 + $0.06)
Dec. 31 Cash 30,100
Investment in Shouse Inc. Stock 30,100
31 Investment in Shouse Inc. Stock 53,200
Income of Shouse Inc. 53,200
To record 28% of Shouse Inc.
income $190,000 × (70,000 shares ÷
250,000 shares).
31 Unrealized Gain (Loss) on Available-forSale
Investments 33,000
Valuation Allowance for Available-forSale
Investments* 33,000
*($30.00 – $33.00) × 11,000 shares 
2.
 DAFFITAR INC.
Balance Sheet (selected items)
December 31, 2015
Current assets:
Available-for-sale investments (at cost)
1 $297,000
Plus valuation allowance for available-forsale
investments 33,000
Available-for-sale investments (at fair value)
2 $330,000
Investments:
Investment in Shouse Inc. stock3 $399,100
Stockholders’ equity:
Retained earnings $465,000
Unrealized gain (loss) on available-for-sale
investments 33,000
1 11,000 shares × $27 per share
2 11,000 shares × $30 per share
3 $376,000 + $53,200 – $30,100