Question

On July 1, 2018, Gupta Corporation bought 25% of the outstanding common stock of VB Company for $160 million cash. At the date of acquisition of the stock, VB’s net assets had a total fair value of $540 million and a book value of $280 million. Of the $260 million difference, $58 million was attributable to the appreciated value of inventory that was sold during the last half of 2018, $156 million was attributable to buildings that had a remaining depreciable life of 15 years, and $46 million related to equipment that had a remaining depreciable life of 5 years. Between July 1, 2018, and December 31, 2018, VB earned net income of $60 million and declared and paid cash dividends of $52 million.

Required:
1. Prepare all appropriate journal entries related to the investment during 2018, assuming Gupta accounts for this investment by the equity method.
2. Determine the amounts to be reported by Gupta.

Answer 1

Answer:

Part 1
Date	Account Titles and Explanation	Debit	Credit	W.N
01-07-2018	Investment in Company V Shares	160,000,000
	Cash		160,000,000
	To record purchase of investment
31-12-2018	Investment in Company LC Shares	15,000,000		=60000000*25%
	Investment Revenue		15,000,000
	To record shares of net income as revenue from Investment
31-12-2018	Cash	13,000,000		= 52000000*25%
	Investment in Company LC Shares		13,000,000
	To record receipt of dividends
31-12-2018	Investment Revenue	16,950,000		W.N 3
	Investment in Company V Shares		16,950,000
	To record amortization adjustment

W.N 3
Details Amount	Amount	Calculation
Share of investor in fair value of investee’s net assets	135,000,000	=(540,000,000*25%)
Share of investor in book value of investee’s net assets	70,000,000	=(280,000,000*25%)
Difference of depreciable net assets	65,000,000
Amount attributed to inventory	14,500,000	=(58,000,000*25%)
Amount attributed t building	39,000,000	=(156,000,000*25%)
Deprecation of Building	1,300,000	=39,000,000/15*6/12
Amount attributed to equipment	11,500,000	=(46,000,000*25%)
Depreciation of Equipment	1,150,000	=11,500,000/5*6/12
Total Amortization	16,950,000	=14,500,000+1,300,000+1,150,000

Part 2
Investment in Company V Shares
Details	Debit	Details	Credit
Cost	160,000,000	Dividends	13,000,000
Share of Income	15,000,000	Depreciation	16,950,000
Total	175,000,000	Total	29,950,000
Balance	145,050,000

Investment Revenue
Details	Debit	Details	Credit
Depreciation	16,950,000	Share of Income	15,000,000
Total	16,950,000	Total	15,000,000
		Balance	1,950,000