Question

On January 2, 2018, Johnson Company paid $262,000 to acquire 12,000 shares of Pets Corp. The investment represented 25% of the total shares outstanding of Pets Corp. and gave Johnson 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 $269,000. 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 $772,000 and the fair value of the assets at that time were consistent with the book value except for Equipment which was undervalued by $36,000, with a remaining life of 10 years. Any excess fair value attributable to the acquisition (over cost of acquisition) was applied to goodwill. 1. Prepare all appropriate journal entries related to the investment for 2018, assuming Johnson 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 12,000 shares only represented 10% of the outstanding stock of Pets Corp. and Johnson 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

Answer 1

Solution 1
Date	Account Title & Explanation	Debit ($)	Credit ($)
	Investments in Pets Corp.	262000
	Cash		262000
	(To record purchase of 12000 shares.)
	Cash	21000
	Investments in Pets Corp.		21000
	(To record receipt of 1.75 dividend on 12000 shares.)
	Investments in Pets Corp.	67250
	Investment Revenue		67250
	(To record net income for 25%)
	Working:	$
	Net income	269000
	Dividend	-84000
	Net income after dividend	185000
	Share in above (25%)	46250
	Cost of the investment	262000
	Net value of investment at the end of the year	308250
Solution 2
Date	Account Title & Explanation	Debit ($)	Credit ($)
	Investments in Pets Corp.	80800
	Goodwill	181200
	Cash		262000
	(To record investment at cost & excess paid for goodwill)
	Amortization Expenses	18120
	Goodwill		18120
	(To record amortization of goodwill for 10 years)
	Cash	21000
	Dividend Income		21000
	(To record receipt of 1.75 dividend on 12000 shares.)
	Working: Computation of goodwill:	$
	Book Value	772000
	Add: Fair value adjustment	36000
	Fair value of net assets	808000
	Fair value of investments (10%)	80800
	Cost of acquisition	262000
	Goodwill	181200

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