Question

Change from Significant Influence to Control

Organic Juices, Inc. holds a 40 percent interest in Healthy Snax. It acquires the remaining interest in Healthy Snax for $60 million in cash. Organic uses the equity method to report its investment prior to acquisition of the remaining interest; the investment has a reported balance of $25 million, and its fair value is $40 million. Healthy Snax’s balance sheet at the date its remaining interest is acquired, along with fair value information for Healthy Snax’s assets and liabilities, follows (in millions).

Current assets	$10	Current liabilities	$12
Plant and equipment	65	Long-term debt	36
Intangible assets	5	Capital stock	18
		Retained earnings	24
		Treasury stock	(10)
Total assets	$80	Total liabilities and equity	$80

A consulting firm values Healthy Snax's plant and equipment at $20 million and its reported intangibles at $15 million. Due to declining interest rates, long-term debt has a fair value of $38 million. There are no unreported identifiable intangibles, and all other assets and liabilities are reported at amounts approximating fair value.

Required

Prepare the journal entries Organic Juices makes to record the acquisition of the remaining 60 percent interest in Healthy Snax.
Assume Organic records Healthy Snax’s assets and liabilities directly on its books.

Enter answers in millions.

Description		Debit	Credit
Answer

	Answer	Answer
Answer

	Answer	Answer
To revalue the equity method investment to fair value
Current assets		Answer	Answer
Plant and equipment		Answer	Answer
Intangible assets		Answer	Answer
Answer

	Answer	Answer
Current liabilities		Answer	Answer
Long-term debt		Answer	Answer
Cash		Answer	Answer
Answer

	Answer	Answer
To record acquisition of the remaining shares of Healthy Snax.

Answer 1

Part 1

Account titles and explanation	Debit	Credit
Investment in Healthy Snax (40-25)	15
Gain on equity method investment (income)		15
To revalue the equity method investment to fair value

Part 2

Account titles and explanation	Debit	Credit
Current assets	10
Plant and equipment	20
Intangible assets	15
Goodwill (balancing figure)	105
Current liabilities		12
Long-term debt		38
Cash		60
Investment in Healthy Snax		40
To record acquisition of the remaining shares of Healthy Snax.