Question

On January 1, 2013, Jolley Corp. paid $250,000 for 25% of the voting common stock of Tige Co. On that date, the book value of Tige was $850,000. A building with a carrying value of $160,000 was actually worth $220,000. The building had a remaining life of twenty years. Tige owned a trademark valued at $90,000 over cost that was to be amortized over 20 years.

During 2013, Tige sold to Jolley inventory costing $60,000, at a markup of 50% on cost. At the end of the year, Jolley still owned some of these goods with a transfer price of $33,000. Jolly uses a perpetual inventory system.

Tige reported net income of $200,000 during 2013. This amount included an extraordinary gain of $35,000. Tige paid dividends totaling $40,000.

1. Prepare the purchase price allocation?

2. Prepare all of Jolley's journal entries for 2018 in relation to Tige Co. Assume the equity method is appropriate for use.

Answer 1

a) Schedule of Purchase Price Allocation
Fair value of (purchase) consideration transferred	$ 250,000.00
Less: Book value of net assets (850000 x 25%)	$ 212,500.00
	$   37,500.00
		Life	Amotization Expense
Building [($220,000 - $160,000 x 25%	$   15,000.00	20	$     750.00
Trademark [($90,000 × 25%	$   22,500.00	20	$  1,125.00
Total Amortization Expenses			$  1,875.00
b)
Account Titles and Explanation	Debit	Credit
Investment in Tige Co.	250,000
Cash		250,000
To record the initial investment in Tige Co.
Investor Cost of Intra-Entity Inventory	90,000
Cash		90,000
To record the purchase of inventory from Tige Co.
Investment in Tige Co. ($200,000 x 25%)	50,000
Equity in Tige Co. Income ($200,000 - $35,000) × 25%		41,250
Gain of Tige Co.    (  $35,000 × 25%)		8,750
To record share of Tige Co.’s income.
Cash (40000 x 25%)	10,000
Investment in Tige Co.		10,000
To record the receipt of dividend.
Equity in Tige Co. Income	1,875
Investment in Tige Co.		1,875
To record amortizations.
Equity in Tige Co. Income	2,750
Investment in Tige Co.		2,750
To defer its share of gross profit on Intra-Entity.
Calculation of deferred gross profit on intra-entity inventory sales:
Cost  + 50% cost =  $60,000 + $30,000	90000
Cost	-60000
Gross profit	30000
GP % = 30,000/90,000 =	33%
Remaining inventory	33000
= Intra-entity gross profit remaining in ending inventory	11000
Jolley’s ownership %	x 25%
Deferred gross profit on intra-entity inventory sales	2750