Question

Exercise 12-23 (Algo) Equity method [L012-6, 12-7] On January 1, 2021, Cameron Inc. bought 20% of the outstanding common stock of Lake Construction Company for $360 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 $800 million. Its book value was $700 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 $280 million. During 2021, Lake declared and paid cash dividends of $25 million. The buildings have a remaining life of 10 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. 2. Determine the amounts to be reported by Cameron.

Answer 1

Answer :-

Required 1 Calculation :-

($ in million)	Investee Net Assets		Ownership Interest			Net Assets purchased	Difference	Attributable to :
Cost						$360
Fair Value Lake Construction's assets	$800	×	20	%	=	$160	$200 ($360 - $160)	Goodwill
Book Value Lake Construction's assets	$700	×	20	%	=	$140	$20 ($160 - $140)	Undervaluation of assets
Depreciation adjustment:			Years			Adjustment
Investment revenue	$10 (Note -1)	/	10			$1

Note 1) Undervaluation of Asset / 2 = $20 millions / 2 = $10 millions

Required 1 GJ -

	Particular	Amount (Dr.)	Amount (Cr.)
1.	Investment in Lake Construction Share A/c Dr.	$360
	To Cash A/c		$360
	(To Record the investment in Lake Construction shares )
2)	Investment in Lake Construction Share A/c Dr.	$56
	To Investment revenue A/c (Note -2)		$56
	(To Record the investor's share of net income)
3)	Cash A/c Dr. (Note - 3)	$5
	Investment in Lake Construction Share A/c		$5
	(To Record the cash dividends)
4)	Investment revenue A/c. Dr.	$1
	Investment in Lake Construction Share A/c		$1
	(To Record the adjustment for depreciation)

Note -2)Investors share of Net Income = Net Income × Ownership Interest

Investors share of Net Income = $280 millions × 20% = $56 million

Note -3)Cash Dividend = Dividend Declared × Ownership Interest

Cash Dividend = $25 millions × 20% = $ 5 millions

Required 2:-

	($ in millions)
a) Investment in Cameron's 2021 balance sheet (Note -4)	$410
b) Investment revenue in the Income Statement ( Note -5)	$55
c) Investing activities in the statement of Cash flows (Note -6)	$360

Note 4) Investment in Lake Construction Share A/c

Particular	$ in millions	Particular	$ in millions
To Cash	$360	By Cash (Dividends)	$5
To Investment revenue(share of Income)	$56	By Investment revenue(Dividends)	$1
		By balance	$410
Total	$416	Total	$416

Note -5 ) Investment revenue in the Income Statement

= Share of Income in Net Income - Depreciation Adjustment

Share of Income in Net Income= $ 56

Deprecation Adjustment= $1

Investment revenue = $56 - $1 = $55

Note 6)Cameron Inc. bought 20% of the outstanding common stock of Lake Construction Company for $360 million cash.

So $360 millions is Investing Activities in Cash flows Statement