Question

Exercise 12-24 (Algo) Equity method, partial year [LO12-6, 12-7] On July 1, 2021, Gupta Corporation bought 20% of the outstanding common stock of VB Company for $100 million cash, giving Gupta the ability to exercise significant influence over VB’s operations. At the date of acquisition of the stock, VB’s net assets had a total fair value of $450 million and a book value of $200 million. Of the $250 million difference, $35 million was attributable to the appreciated value of inventory that was sold during the last half of 2021, $165 million was attributable to buildings that had a remaining depreciable life of 15 years, and $50 million related to equipment that had a remaining depreciable life of 10 years. Between July 1, 2021, and December 31, 2021, VB earned net income of $35 million and declared and paid cash dividends of $30 million. Required: 1. Prepare all appropriate journal entries related to the investment during 2021, assuming Gupta accounts for this investment by the equity method. 2. Determine the amounts to be reported by Gupta.

Answer 1

Part 1
Date	Account Titles and Explanation	Debit	Credit	W.N
01-07-2021	Investment in Company V Shares	10,00,00,000
	Cash		10,00,00,000
	To record purchase of investment
31-12-2021	Investment in Company GC Shares	7,000,000		=35000000*20%
	Investment Revenue		7,000,000
	To record shares of net income as revenue from Investment
31-12-2021	Cash	6,000,000		= 30000000*20%
	Investment in Company GC Shares		6,000,000
	To record receipt of dividends
31-12-2021	Investment Revenue	8,600,000		W.N 3
	Investment in Company V Shares		8,600,000
	To record amortization adjustment

W.N 3
Details Amount	Amount	Calculation
Share of investor in fair value of investee’s net assets	90.000,000	=(450*20%)*1000000
Share of investor in book value of investee’s net assets	40,000,000	=(200*20%)*1000000
Difference of depreciable net assets	50,000,000
Amount attributed to inventory	7,000,000	=(35*20%)*1000000
Amount attributed t building	33,000,000	=(165*20%)*1000000
Deprecation of Building	1,100,000	=33000000/15*6/12
Amount attributed to equipment	10,000,000	=(50*20%)*1000000
Depreciation of Equipment	500,000	=10,000,000/10*6/12
Total Amortization	8,600,000	=7,000,000+1,100,000+500,000

Part 2
Investment in Company V Shares
Details	Debit	Details	Credit
Cost	100,000,000	Dividends	6,000,000
Share of Income	7,000,000	Depreciation	8,600,000
Total	107,000,000	Total	14,600,000
Balance	92,400,000

Investment Revenue
Details	Debit	Details	Credit
Depreciation	8,600,000	Share of Income	7,000,000
Total	8,600,000	Total	7,000,000
		Balance	1,600,000

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