Question

Calculate income and investment balance allocation of excess to undervalued assets

Dok Company acquired a 30 percent interest in Oak on January 1 for $2,000,000 cash. Assume the cost of the investment equals the fair value of Oak’s net assets. Dok assigned the $500,000 fair value over book value of the interest acquired to the following assets:

Inventories

$100,000 (sold in the current year)

Building

$200,000 (4-year remaining life at January 1)

Goodwill

$200,000

During the year Oak reported net income of $800,000 and paid $200,000

Question:

1- journal entries, posted then to T- Accounts ?

2- determine doks income from oak?

3- determine the December 31 balance of the investment in oak account?

Answer 1

1) Income from Oak
Share of Oak’s reported income ($800,000 x 30%)	$    240,000.00
Less: Excess allocated to inventory	$    100,000.00
Less: Depreciation of excess allocated to building ($200,000/4 years)	$      50,000.00
Income from Oak	$      90,000.00
2) Investment account balance at December 31
Cost of investment in Oak	$ 2,000,000.00
Add: Income from Oak	$      90,000.00
Less: Dividends ($200,000 x 30%)	$      60,000.00
Investment in Oak December 31	$ 2,030,000.00