On January 2, 2018, Smith Company paid $252,000 to acquire 10,000 shares of Pets Corp. The...
On January 2, 2018, Smith Company paid $252,000 to acquire 10,000 shares of Pets Corp. The investment represented 25% of the total shares outstanding of Pets Corp. and gave Smith Company the ability to exert significant influence upon the operations of Pets Corp. During the year ended December 31, 2018, Pets Corp. paid dividends of $1.75 per share (declared and paid on November 12, 2018) and reported income of $259,000. The market value of Pets Corp. stock at December 31, 2018, was $19.75 per share. On the date of the acquisition the book value of Pets Corp. was $752,000 and the fair value of the assets at that time were consistent with the book value except for Equipment which was undervalued by $35,000, with a remaining life of 10 years. Any excess fair value attributable to the acquisition (over cost of acquisition) was applied to goodwill.
1. Required: Prepare all appropriate journal entries related to the investment for 2018, assuming Smith uses the equity method to account for the acquisition. Show your work representing the development and allocation of the consideration paid.
2. Prepare all appropriate journal entries related to the investment for 2018, assuming that the purchase of the 10,000 shares only represented 10% of the outstanding stock of Pets Corp. and Smith uses the fair value method to account for the acquisition. Keep in mind the new rules associated with investments in stock instruments – must be treated as trading securities, effective 2018
Homework Answers
| 1. Date | Account Title | Debit | Credit |
| 25%-Significant Influence | |||
| Jan.2,2018 | Equity Investment in Pets Corp. | 252000 | |
| Cash | 252000 | ||
| Nov.12,2018 | Cash | 17500 | |
| Equity Investment in Pets Corp. | 17500 | ||
| (10000 shares * $ 1.75) | |||
| Dec.31,2018 | Equity Investment in Pets Corp. | 64750 | |
| Investment income | 64750 | ||
| (259000*25%) | |||
| Value of 25% Smith Co.'s share | 252000 |
| So,Value of 100% share(252000/25%*100%) | 1008000 |
| Less: Fair value of assets(752000+35000) | 787000 |
| 100% Goodwill | 221000 |
| Allocation of the consideration paid by Smith Co. | |
| Towards fair value(787000/10080000*252000) | 196750 |
| Towards Goodwill(221000/1008000*252000) | 55250 |
| Total consideration paid by Smith Co. | 252000 |
| 10% share-holdings in Pets Corp. | |||
| Jan.2,2018 | Trading secuirities -Pets Corp. | 252000 | |
| Cash | 252000 | ||
| ($ 252000/10000 shares= $ 25.2/share) | |||
| Nov.12,2018 | Cash | 17500 | |
| Dividend Income | 17500 | ||
| (10000 shares * $ 1.75) | |||
| Dec.31,2018 | Unrealised holding loss(Income statement a/c) | 54500 | |
| Trading secuirities -Pets Corp. | 54500 | ||
| (25.2-19.75)*10000 | |||
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