Question
In: Accounting
On January 1, 2018, Cameron Inc. bought 10% of the outstanding common stock of Lake Construction...
On January 1, 2018, Cameron Inc. bought 10% of the outstanding
common stock of Lake Construction Company for $170 million cash. At
the date of acquisition of the stock, Lake's net assets had a fair
value of $700 million. Their book value was $600 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,
2018, was $170 million. During 2018, Lake declared and paid cash
dividends of $20 million. The buildings have a remaining life of 5
years.
Required:
1. Complete the table below and prepare all
appropriate journal entries related to the investment during 2018,
assuming Cameron accounts for this investment by the equity
method.
2. Determine the amounts to be reported by
Cameron.Determine the amounts to be reported by Cameron. (Amounts
to be deducted should be indicated with a minus sign. Enter your
answers in millions, (i.e., 10,000,000 should be entered as
10).)
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Solutions
Expert Solution
1)
| Journal Entries showing Investment | ||
| Particulars | Debit (In Million$) | Credit (In Million$) |
| Investment in Lake construction (common stock) | $170 | |
| cash | $170 | |
| (Investment in common stock for cash ) | ||
| Investment in Lake construction (common stock) | $17 | |
| Investment Revenue | $17 | |
| (10% on revenue income 170$) | ||
| cash | $2 | |
| Investment in Lake construction (common stock) | $2 | |
| (10% on dividends payout in cash . 10% of 20 M$) | ||
| Investment Revenue | $1 | |
| Investment in Lake construction (common stock) | $1 | |
| (Adjustment of depreciation ) | ||
| Fair value =700M$ | ||
| Book value = 600M$ | ||
| Difference = 100M$ | ||
| one half of the difference =100/2=$50M | ||
| Remaining Life of Building =5 years | ||
| Value = 50M$/5years = 10 M $ . 10% of 10M$ = 1M$ |
2. Amounts to be reported by cameron
a) Investment in cameron's Balancesheet
Cost + Share of net income - Share of net loss - Dividend received - Adjustments in depreciation = Carrying value of investment
= $170M + 17-2-1
= $184 M
b) Investment revenue in the income statement
Investment revenue - adjustments in depreciation
$17M-$1M= $16M
$16M
c) Investing activities in the statement of cash flow
Investment- dividents payouts received
170M$ - 2M$
=168M$
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