Question

Milani, Inc., acquired 10 percent of Seida Corporation on January 1, 2020, for $195,000 and appropriately accounted for the investment using the fair-value method On January 1, 2021, Milani purchased an additional 30 percent of Seida for $641000 which resulted in significant influence over Seida. On that date, the fair value of Seida's common stock was $2,080,000 in total. Seida's January 1, 2021, book value equaled $1.930,000, although land was undervalued by $130,000. Any additional excess fair value over Selda's book value was attributable to a trademark with an eight-year remaining life. During 2021. Seida reported income of $342,000 and declared and paid dividends of $100,000. Prepare the 2021 journal entries for Milani related to its investment in Seida. (If no entry is required for a transaction/event, select "No journal entry required" in the first account field.)

Answer 1

Journal entries

(Amount in $)

Transaction	General Journal	Debit	Credit
1	Investment in Seida Corporation	6,41,000
	Cash		6,41,000
	( To record acquisition of seida's stock)
2	Investment in Seida Corporation **	1,36,800
	Equity income-Investment in Seida		1,36,800
	( To income from seida for 2021)
3	Equity income-Investment in Seida	3,125
	Investment in Seida		3,125
	( To record amortization for 2021)
4	Dividends receivable ***	40,000
	Investment in Seida		40,000
	( To record dividend declaration for seida)
5	Cash	40,000
	Dividends receivable		40,000
	( To record collection of dividend from investee)

Calculation annual amortization

(Amount in $)

Reference	Particulars	Amount
a	Purchase price of 30% of Seida’s stock	6,41,000
b	Fair value of original 10% investment in Seida	2,08,000
	[20,80,000x10%= 208,000]
c=a+b	Total fair value of 40% investment in Seida	8,49,000
d	Book value of Seida stock	7,72,000
	[$19,30,000 × 40%]
e=c-d	Fair value in excess of book value	77,000
f	Excess cost assigned to undervalued land	52,000
	($130,000 × 40%)
g=e-f	Trademark	25,000
h	Remaining life of Trademark	8 years
g/h	Annual amortization	3125

Equity income-Investment in Seida ** $3,42,000*40%= $1,36,800

Dividend *** $100,000*40% = $40,000