Question

On January 1, 2018. Cameron Inc. bought 10% of the outstanding common stock of Lake Construction Company for $190 million cash At the date of acquisition of the stock, Lake's net assets had a fair value of $900 million. Their book value was 5800 million. The difference was attributable to the fair value of Lake's buildings and its land exceeding book value, each accounting for one-half of the difference. Lake's net income for the year ended December 31, 2018, was $290 million. During 2018, Lake declared and paid cash dividends of $30 million. The buildings have a remaining life of 5 years. Required: 1. Complete the table below and prepare all appropriate journal entries related to the investment during 2018, assuming Cameron accounts for this investment by the equity method. 2. Determine the amounts to be reported by Cameron Complete this question by entering your answers in the tabs below. Required 1 Calculation Required 1 G Required 2 Complete the table below. (Enter your answers in millions, i.e., 10,000,000 should be entered as 10)). Ownership Interest Net Assets Difference Purchased Difference Attributable to: Investee (S in millions) Net Assets Cost Fair Value Cameron's assets Book Value Cameron's assets Investment revenue Required 16J >

Answer 1

Solution:
($ In Millions)	Investee Net Assets	Ownership Interest	Net Assets Purchased	Difference		Attributed to
Cost			$190
Fair value Cameron's assets	$900	10%	$90	$100	($190-$90)	Goodwill
Book value Cameron's assets	$800	10%	$80	$10	($90-$80)	Undervaluation of Assets (land & building)
Fair value Cameron's assets i.e Fair value of Net Assets Purchased =	Investee Net Assets i.e Lake Construction company Fair value of assets * Ownership accquired
	$900Million *10% =$90 Million
Book value Cameron's assets i.e Book value of Net Assets Purchased =	Investee Net Assets i.e Lake Construction company Book value of assets * Ownership accquired
	$800Million *10% =$80 Million
Difference between Cost Of assets purchased and Fair value of Cameron's asset would result into Goodwill
Difference = Cost of Asset purchased of Lake construction company - Fair value of Cameron's asset
$190-$90
Goodwill = $100
Difference between Fair value of Cameron's asset and Book value of Cameron's asset would result into undervaluation of asset
As Fair value is greater than Book value, the assets are undervalued by $10 ($90-$80)
The difference is attributable to Land and building equally (Given)
Land	$5
Building	$5
As it is given that building has remaining life of 5 Years
	Undervaluation of Building	Years	Adjustments
Investment Revenue	$5	5	$1	($5/5)
Journal Entries ( In Millions)
Date	Particulars	Debit	Credit
1	Investment in Lake construction Company	$190
	Cash		$190
	(To record investment made in cash )
2	Investment in Lake construction Company	$29
	Investment Revenue		$29
	(Net income of Lake Construction Co.* Ownership interest acquired)
	($290 Million *10% = $29 Million)
	(To record Net income from investment made)
3	Cash	$3
	Investment in Lake construction Company		$3
	(Dividend paid by Lake contrcution Co. *Ownership interest)
	($30 Million *10% = $3Million)
4	Investment Revenue	$1
	Investment in Lake construction Company		$1
	(To Record Depreciation on Building)
	($5 Building value /5 Years life)
2)
Calculation of amount to be reported by Cameron:
		(In Million $)
Investment made in Lake construction Company		$190
Add: Share in Net income of Lake Contruction Company		$29
Less: Dividend Received by Lake contruction company		($3)
Less: Depreciation of Building purchased		($1)
Investment made in Lake construction Company		$215
Amount to be reported by Cameron = $215 Million