Question

Plug Corporation acquired 35 percent of Spark Corporation’s stock on January 1, 20X8, by issuing 25,000 shares of its $2 par value common stock. Spark Corporation’s balance sheet immediately before the acquisition contained the following items:

SPARK CORPORATION
Balance Sheet
January 1, 20X8
	Book Value				Fair Value
Assets
Cash & Receivables		$	40,000			$	40,000
Inventory (FIFO basis)			80,000				100,000
Land			50,000				70,000
Buildings and Equipment (net)			240,000				320,000
Total Assets		$	410,000			$	530,000
Liabilities & Equities
Accounts Payable		$	70,000			$	70,000
Common Stock			130,000
Retained Earnings			210,000
Total Liabilities & Equities		$	410,000

Shares of Plug were selling at $8 at the time of the acquisition. On the date of acquisition, the remaining economic life of buildings and equipment held by Spark was 20 years. The amount of the differential assigned to goodwill is not impaired. For the year 20X8, Spark reported net income of $70,000 and paid dividends of $10,000.

Required:

1. Journal entries
a) Record the acquisition of Spark Corporation stock.

b)Record the dividend from Spark Corporation

c) Record the equity-method income.

d) Record the expiration of the differential assigned to inventory.

e) Record the entry to amortize the differential assigned to buildings and equipment.

2. What balance will Plug report as its investment in Spark at December 31, 20X8?

Answer 1

Answer:-

1) Journal Entries:-

Date	Particulars	Debit	Credit
A	Investment in Spark Corporation’s Stock	$200,000
	Common stock		$50,000
	Additional Paid in Capital		$150,000
	(Being the acquisition of Spark Corporation stock)
B	Cash ($10,000*35%)	$3,500
	Investment in Spark Corporation’s Stock		$3,500
	(Being the dividend from Spark Corporation)
C	Investment in Spark Corporation’s Stock	$24,500
	Income from Spark Corporation’s Stock		$24,500
	(Being the equity-method income)
D	Income from Spark Corporation’s Stock ($20,000*35%)	$7,000
	Investment in Spark Corporation’s Stock		$7,000
	(Being the expiration of the differential assigned to inventory)
E	Income from Spark Corporation’s Stock [($80,000*35%)/20 Years]	$1,400
	Investment in Spark Corporation’s Stock		$1,400
	(Being the entry to amortize the differential assigned to buildings and equipment)

2) What balance will Plug report as its investment in Spark at December 31, 20X8?

investment in Spark at December 31, 20X8 = $200,000+$24,500-$3,500-$7,000-$1,400 = $212,600

Therefore, Plug report as its investment in Spark at December 31, 20X8 is $212,600

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