Question

On January 1, 2018, Jolley Corp. paid $250,000 for 25% of the voting common stock of Tige Co. On that date, the book value of Tige was $850,000. A building with a carrying value of $160,000 was actually worth $220,000. The building had a remaining life of twenty years. Tige owned a trademark valued at $90,000 over cost that was to be amortized over 20 years. During 2018, Tige sold to Jolley inventory costing $60,000, at a markup of 50% on cost. At the end of the year, Jolley still owned some of these goods with an intra-entity selling price of $33,000. Tige reported net income of $200,000 during 2018. This amount included a extraordinary gain of $35,000. Tige paid dividends totaling $40,000.

1. Prepare all of Jolley’s journal entries for 2018 in relation to Tige Co. Assume the equity method is appropriate for use. (Record initial investment, accrual investment income, amortization, dividend, and URGP if there is any)

2. What is the investment in Tige would be reported on Jolley’s 12/31/2018 financial statements?

3. If Jolley sold half of its investment in Tige for 400,000 on 1/1/2019, calculate the cost of the investment sold and then report the gain or loss on the sale of investment.

Answer 1

(10) Credit Debit $ 2,50,000 $ 2,50,000 $ 90,000 $ 90,000 $ 50,000 $ $ 41,250 8,750 Account Titles and Explanation Investment in Tigo Co. Bank (To record purchase of common stock Tige Co.) Inventory $60,000 X 150%) Bank (To record inventory purchase from Tigo Co.) Investment in Tigo Co. Equity in Tigo's Income (($200,000 - $35,000) X 25%) Extraordinary Gain of Tigo Co. ($35,000 X 25%) (To record share from Tigo's Co.) Bank Investment in Tigo Co. (To record dividends received) Equity in T's Income Investment in Tigo Co. To record amortization) Equity in T's Income Investment in Tigo Co. (To record unrealized profit from Inventory) 4 $ 10,000 $ 10,000 $ 1,875 $ 1,875 $ 2,750 $ 2,750 Explanation Amortization amount Building [($220,000 - 160,000) / 20] X 25% Trademark ($90,000 / 200 X 25% 750 1,125 1,875 Total $ $ 90,000 60,000 $ Unrealized profit in inventory_ Selling price of inventory ($60,000 X 150%) Less: Cost of Inventory to Tigo Co. Gross profit Ratio of gross profit to selling price ($30,000 / $ 90,000) Remining Inventory Profit in remining inventory ($33,000 X 1/3) Jolley Corp.'s ownership Unrealized profit in remining inventory ($11,000 X 25%) $ $ 30,000 1/3 33,000 11,000 25% 2,750 $

Amount $ 2,50,000 Investment in Tigo Co. Particulars Purchase of common stock Tige Co. Add: Equity in Tigo's Income (($200,000 - $35,000) X 25%) Extraordinary Gain of Tigo Co. ($35,000 X 25%) Less: Dividends Received Amortization Unrealized profit in inventory Ending Balance of Investment in Tigo Co. $ 41,250 $ 8,750 $ -10,000 $ -1,875 $ -2,750 $ 2,85,375