Question

On January 1 , 2017, Newyork Capital Corporation purchased 30% of the outstanding common shares of Delta Crating Corp. for $250 million and accounts for this investment under the equity method. The following information is available regarding Delta Crating Corp.

($ in millions)

Net identifiable assets at 1/1/2017 acquisition:

Fair Value	700
Book Value	500
2017 Net Income	100
2017 Dividends declared and paid	30
2018 net income	80
2018 dividends declared and paid	20
12/31/2017 fair value (based on market value)	1,000
12/31/2018 fair value (based on market value)	1,200

Two-thirds of the difference between the book value and fair value of Delta's identifiable net assets at acquisition is attributable to depreciable assets having fair value greater than their book value and the remaining one-third is attributable to land having fair value in excess of its book value. The depreciable assets have an average remaining useful life of 10 years and are being depreciated by the straight-line method with zero residual value.

Required:

1. Provide the journal entries that Newyork Capital would make in 2017 and 2018 to account for its investment in Delta Crating under the equity method. Provide supporting details for all calculations needed.

2. Determine the carrying value of Newyork's Investment in Delta Crating account on December 31, 2017, and December 31, 2018, under the equity method.

3. Now assume that Newyork elected the fair value option for the equity method on the January 1, 2017, acquisition date. Repeat requirements 1 and 2.

4. Based on your answers, discuss the impact of the fair value option on Newyork's net profit margin in 2017 and 2018.

Answer 1

1			Journal Entries
			to record the investment made in company D for the yr 2017
	SN	Account Title	Debit -$	Credit -$
	1	Investment in Company D	$250
		Cash		$250
		being investment in company D is now made and recorded
	2	Investment in Company D-100*30%	$30
		Income from Company D		$30
		being 30% reported income is now reognized
	3	Income from Company D-(60*2/3)/10	$4
		Investment in Company d		$4
		being the excess of fair value over book value is attributable now
	4	Cash	$9
		Investment in Company D		$9
		Being dividend declared and investment account is now recorded
		Calculation of amount of additional depreciation
		Particulars	Net Assets of Com D	Net Assets Purchased -50%
		Cost		250
		fair Value	700	700*30%-210
		Book Value	500	500*30%-150
		Amount attributable to goodwill		40
		Amount attributable to undervaluation of assets reported of company D		60
		Amount attributable to undervaluation of depreciable assets		60*2/3-40
		Amount of Additional Depreciation under equity method		40/10-4
			Journal Entries
			to record the investment made in company D for the yr 2018
	SN	Account Title	Debit -$	Credit -$
	1	Investment in Company D-80*30%	$24
		Income from company d		$24
		being 30% reported income is now recognized
	2	Income from company d-(60*2/3)/10	$4
		Investment in Company D		$4
		being the additional depreciation in relation to investment made in company d
	3	Cash	$6
		Investment in Company D		$6
		being dividend declared and investment account is now recorded
2		Calculation the balance of investment in equity securities as on dec 31 2017
			Investment in Equity Securities as on Dec 31 2017
		Particulars	Amount	Particulars	Amount
		Purchase Cost	250	dividends	9
		Equity in Income of Company D	30	Additional Depreciation	4
		Balance	267
		Calculation the balance of investment in equity securities as on dec 31 2018
			Investment in Equity Securities as on Dec 31 2018
		Particulars	Amount	Particulars	Amount
		Balance on Dec 31 2017	267	Dividends	6
		Equity in Income of Company d	24	Additional Depreciation	4
		balance	281
3			Journal Entries
			to record the investment made in company D for the yr 2017 by fair value method
	SN	Account Title	Debit -$	Credit -$
	1	Investment in Company D	$250
		Cash		$250
		being investment in company d is now made and recorded
	2	Cash	$9
		Income from Investment		$9
		being dividend income received
	3	Investment in Company D-(1000*.3)-250	$50
		Unrealized Gain on Adjustment of Fair Value		$50
		being increase in fair value now recorded.
			Journal Entries
			to record the investment made in company D for the yr 2018 by fair value method
	SN	Account Title	Debit -$	Credit -$
	1	Cash-20*30%	$6
		Income from Investment		$6
		being the dividend income received
	2	Investment in Company D-(1200*.3)-300	$60
		Unrealized Gain on Adjustment of Fair Value		$60
		being the increase in fair value now recorded
		Calculate of balance of investment under fair value method yr 2017
		Particulars	Amount	Particulars	Amount
		Purchase Cost	250
		Fair Value adjustment	50
		Balance	300
		Calculate of balance of investment under fair value method yr 2018
		Particulars	Amount	Particulars	Amount
		Balance as on dec 31 2017	300
		Fair Value adjustment	60
		Balance	360
4		Showing comparison on Investment income in yr 2017 and 2018 under equity method and fair value method
		Particulars	equity Method	Fair Value Method
		Investment Income in Yr 2017	30-4	9+50
		Investment Income in Yr 2018	24-4	6+60
		This is concluded that the net profit margin of company N is higher in adopting fair value option in comparison to equity method
		in both yrs 2017 and 2018 due to increase in fair value of company D