Question

Exercise 12-22 (Algo) Equity method; adjustment for depreciation [LO12-6, 12-7]

Fizer Pharmaceutical paid $85 million on January 2, 2021, for 5 million shares of Carne Cosmetics common stock. The investment represents a 20% interest in the net assets of Carne and gave Fizer the ability to exercise significant influence over Carne’s operations. Fizer received dividends of $3 per share on December 21, 2021, and Carne reported net income of $35 million for the year ended December 31, 2021. The fair value of Carne’s common stock at December 31, 2021, was $35.50 per share.

• The book value of Carne's net assets was $210 million.
• The fair value of Carne's depreciable assets exceeded their book value by $50 million. These assets had an average remaining useful life of ten years.
• The remainder of the excess of the cost of the investment over the book value of net assets purchased was attributable to goodwill.

Calculation General Journal Complete the table below. (Enter your answers in millions, (i.e., 10,000,000 should be entered as 10). Net Assets ($ in millions) Investee Net Assets Ownership Interest Difference Attributable to: Purchase Price Fair Value Carne's assets Book Value Carne's assets Purchased Difference $ 85 $ 0 $ 0 x x 20 % 201% = = Years Adjustment Depreciation adjustment: Investment revenue

Journal Entry 1

Record the investment in carne cosmetics shares

Journal Entry 2

Record the investor's share of net income

Journal Entry 3

Record the cash dividends

Journal Entry 4

Record the depreciation adjustment

Journal Entry 5

Record the fair value adjustment at year-end

Required:
Complete the table below and prepare the appropriate journal entries related to the investment during 2021.

Answer 1

($ in millions)	Investee Net Assets		Ownership Interest			Net Assets Purchased	Difference	Attributable to:
Cost						85
Fair Value Cameron's assets	260	x	20	%	=	52	$23	Goodwill
Book Value Cameron's assets	210	x	20	%	=	42	$10	Undervaluation of assets
Depreciation adjustment:			Years			Adjustment
Investment revenue	$10	/	10		=	$1

210+50 =260

No.	General journal	Debit	Credit
1	Purchase
	Investment in Carne Cosmetics shares	85
	Cash		85
2	Net income
	Investment in Carne Cosmetics shares (35*20%)	7
	Investment Revenue		7
3	Dividends
	Cash (5*3*20%)	3
	Investment in Carne Cosmetics shares		3
4	Depreciation
	Investment Revenue	1
	Investment in Carne Cosmetics shares		1
5	Goodwill
	Investment Revenue (23/(10*1.20))	1.9
	Investment in Carne Cosmetics shares		1.9