Question

On July 1, 2015 Allen Company acquired 70,000 of the outstanding shares of Brown Company for $12 per share. This acquisition gave Allen a 40 percent ownership of Brown and allowed Allen to significantly influence the investee’s decision-making process.

As of July 1, 2015, the investee had assets with a book value of $2 million and liabilities of $600,000. At the time, Brown held equipment appraised at $150,000 above book value; it had a six-year remaining life with no salvage value. Brown also held a copyright with a five-year remaining life on its books that was undervalued $400,000. Any remaining excess cost was attributable to goodwill. Depreciation and amortization are computed using the straight-line method. Allen applies the equity method for its investment in Brown.

Brown’s policy is to pay a $1 per share cash dividend every April 1 and October 1. Brown’s income, earned evenly throughout the year, was $500,000 in 2015, $525,000 in 2015, and $600,000 in 2017. In addition, Allen sold inventory costing $90,000 to Brown for $150,000 during 2015. Brown resold $80,000 of this inventory during 2015 and the remaining $70,000 during 2017.

Required:
A. Prepare the journal entries for Allen for the years 2015 through 2017.

B. Compute the income recognized by Allen in 2016.

C. Compute Allen’s Investment in Brown Company account balance in 2017.

Additional Information for letters D, E & F Only: Assume that Allen Company does not have significant influence over Brown Company, the fair value of the investment at the end of 2015 was $900,000, and the investment is considered an available for sale security.

D. Under these revised circumstances, prepare the journal entries for Allen for 2015. (Hint: You may want to refer to the Intermediate Accounting textbook to assist you with this.)

E. Compute the income recognized by Allen in 2015 under the revised circumstances.

F. Compute Allen’s Investment in Brown account balance in 2015 under the revised circumstances.

Answer 1

		Debit	Credit
A.Journal ENTRIES FOR Allen
1. On Purchase of of investment
on 1 july 2015
	Investment in Brown	840000
	To cash		840000
2. on reciepts of dividend
on 1 oct 2015
	Cash a/c dr	70000
	To Investment in Brown		70000
3. On income of brown
On dec 2015
	Investment in Brown	67800
	To INVESTMENT INCOME		67800
Calculation of Income of 2015
6 month Income	250000
Less Adjustment
Depreciation on Copy RIGHT	40000
Depreciation on Equiments	12500
Profit on inventory	28000
	169500
Share of Allen	67800
4. on 1 april 2016
2. on reciepts of dividend
	Cash a/c dr	70000
	To Investment in Brown		70000
On oct 2016
. on reciepts of dividend
	Cash a/c dr	70000
	To Investment in Brown		70000
5. on 31 dec 2016
On income of brown
On dec 2015
	Investment in Brown	179200
	To INVESTMENT INCOME		179200
Calculation of income recognizes by allen in 2016
Income	525000
Profit on inventory	28000
Less Adjustment
Depreciation on Copy RIGHT	80000
Depreciation on Equiments	25000
Total Income	448000
Share of Allen	179200
6. on 1 april 2017
on reciepts of dividend
	Cash a/c dr	70000
	To Investment in Brown		70000
On oct 2016
on reciepts of dividend
	Cash a/c dr	70000
	To Investment in Brown		70000
7. On Income of 2017
on dec 2017
	Investment in Brown	198000
	To INVESTMENT INCOME		198000
Calculation of income recognizes by allen in 2017
Income	600000
Less Adjustment
Depreciation on Copy RIGHT	80000
Depreciation on Equiments	25000
Total Income	495000
Share of Allen	198000
B.
Calculation of income recognizes by allen in 2016
Income	525000
Profit on inventory	28000
Less Adjustment
Depreciation on Copy RIGHT	80000
Depreciation on Equiments	25000
Total Income	448000
Share of Allen	179200
C. Computation of Investment account balance as on dec 2017
Purchase price	8,40,000.00
Add:- income 2015	67,800.00
income 2016	1,79,200.00
income 2017	1,98,000.00
Less:-
Dividend received in 2015	70,000.00
Dividend received in 2016	1,40,000.00
Dividend received in 2017	1,40,000.00
Balance as on 31 dec 2017	9,35,000.00

D.on july 2015
On Purchase of investment
	Investment in Brown	840000
	To cash		840000
On dec 2015
	Investment in Brown	60000
	To investmet income		60000

E. Income of ivest will be difference of fairvalue and purchase price which is

=900000-840000

=60000

f. Investment will be Recognise on fair value of investmemt which is 900000