Question

Exercise 12-22 (Algo) Equity method; adjustment for depreciation [LO12-6, 12-7]

Fizer Pharmaceutical paid $81 million on January 2, 2021, for 3 million shares of Carne Cosmetics common stock. The investment represents a 20% interest in the net assets of Carne and gave Fizer the ability to exercise significant influence over Carne’s operations. Fizer received dividends of $2 per share on December 21, 2021, and Carne reported net income of $40 million for the year ended December 31, 2021. The fair value of Carne’s common stock at December 31, 2021, was $31.50 per share.

• The book value of Carne's net assets was $205 million.
• The fair value of Carne's depreciable assets exceeded their book value by $45 million. These assets had an average remaining useful life of nine years.
• The remainder of the excess of the cost of the investment over the book value of net assets purchased was attributable to goodwill.

Required:
Complete the table below and prepare the appropriate journal entries related to the investment during 2021.

Answer 1

Compute the undervaluation of Asset as follows ( in millions)
	Investee Net Asset		Ownership Interest	=	Net Asset Purchased	Difference	Attributable to
Purchase Price					81
Fair Value of C Asset (205+45)	250	X	20%	=	50	81-50 = 31	Goodwill
Book Value of C Asset	205	X	20%	=	41	50-41 = 9	Undervaluation of Asset

	Journal Entry in the Books of Fizer Pharmaceutical ( in Million)
Date	particulars	Debit	Credit
jan 2	Investment in Carne Cosmetic	81
2021	Cash		81
	( To record Purchase of Investment)
dec-21	Cash (3*2)	6
2021	Investment in Carne Cosmetic		6
	( To record Dividend received)
dec-31	Investment in Carne Cosmetic	8
2021	Investment Revenue (40*20%)		8
	( To record share of income)
dec-31	Investment Revenue ($9million /9 Year)	1
2021	Investment in Carne Cosmetic		1
	(To Record depreciation adjustment for Undervaluation )