Reference no: EM132850025

Question - On January 1, Year 3 XYZ purchased 15,000 of the voting shares of DOS Inc. (100,000 voting shares outstanding) for $150,000. Management elected to use FVOCI. At December 31, Year 3, the shares of DOS were trading at $11.50 per share.

On July 1, Year 4, XYZ purchased additional 25,000 shares of DOS Inc. in the open market for $300,000. On July 1, Year 4, DOS's common shares were $400,000 and Retained Earnings were $200,000. DOS's carrying values equaled their fair market values on this date, except for a machine, which had a fair market value of $100,000 higher than carrying value. The machine had a useful life of ten (10) years.

DOS reported net income of $50,000 in Year 3 and $54,000 in Year 4, earned evenly over the year. DOS also declared and paid dividends of $12,000 on December 31, Year 3 and $15,000 on December 31, Year 4. During Year 4, XYZ sold $100,000 inventory merchandise to DOS with a profit margin of 20%. 40% of this merchandise remained in DOS inventory at the end of Year 4. Income Tax rate is 10%. DOS Inc. shares were trading for $13 per share at December, 31, Year 4.

Required -

a) Prepare the journal entries for Year 3 and Year 4.

b) Prepare the journal entry, if necessary, if the shares of DOS's were trading for $10 each at January 3, Year 5 and the decline was considered a permanent decline. If no journal entry is required, briefly explain why.