Question

On January 1, 2021, Cameron Inc. bought 20% of the outstanding common stock of Lake Construction Company for $260 million cash, giving Cameron the ability to exercise significant influence over Lake’s operations. At the date of acquisition of the stock, Lake's net assets had a fair value of $900 million. Its book value was $850 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, 2021, was $130 million. During 2021, Lake declared and paid cash dividends of $10 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 2021, assuming Cameron accounts for this investment by the equity method.

Required 1 Calculation Required 2 Required 1 GJ Complete the table below. (Enter your answers in millions, (i.e., 10,000,000 should be entered as 10)). Net Assets Purchased Investee Net Ownership Interest ($ in millions) Difference Attributable to: Assets Cost 260 Fair Value Lake Construction's assets х Book Value Lake Construction's assets Depreciation adjustment: Years Adjustment Investment revenue %3D < Required 1 Calculation Required 1 GJ >

Required 1 GJ:

Record the investment in Lake Construction shares.

Record the investor's share of net income.

Record the cash dividends.

Record the adjustment for depreciation.

2. Determine the amounts to be reported by Cameron.

Answer 1

1.

Particulars	Investee Net Assets	Ownership Interest	Net assets purchased	Difference	Attributable to
Cost			260
Fair Value of assets	900	20%	180	60 (ie 260-180)	Goodwill
Book Value of assets	850	20%	170	10 (ie 180-170)	Undervaluation ($ 5 in Land and $ 5 in Buildings)
Depreciation Adjustment:		Years	Adjustment
Investment Revenue	5$	5	= 1$

Requirement 1 GJ:

1. (1/1/21)	Investment in Lake Construction Co. Dr	260
	To Cash a/c		260
	(Being the investment made)
2. (31/12/21)	Investment in Lake construction Co. (ie., Income $ 130*20%) Dr	26
	To Investment Revenue (or Income from Investment)		26
	(Being Income on Investment earned)
3.(31/12/21)	Cash a/c (ie dividend $ 10 * 20%) Dr	2
	To Investment in Lake construction Co		2
	(Being Dividend from Lake constuction co. Received)
.
4.(31/12/21)	Investment Revenue a/c (or Income from Investment) A/c dr	1
	To Investment in Lake construction Co (from above)		1
	(Being Adjustment for Undervaluation of assets recognised)

2.

a. Investment in cameron balance sheet	$ 283	pls see Note 1
b.Investment revenue in Income statement	$ 25	pls see Note 2
c. Investing activity in cash flow	$ -258 (outflow)	pls see Note 3

Note 1:

Cash invested (Journal entry 1)	260
Share of income (journal entry 2)	26
Cash dividend (journal entry 3)	-2
Depreciation (journal entry 4)	-1
Total	283

Note 2:

Share of Income (journal entry 2)	26
Depreciation (journal entry 4)	-1
Total	25

Note 3:

Cash invested (Journal entry 1)	-260
Cash dividend (journal entry 3)	+2
Total	-258

Please comment in case of any query regarding this solution. Please gives a Thumbs Up.