Question

In: Accounting

Bubble, Inc. acquires 15% of Riley Corporation on January 1,2018, for $130,000 when the book...

Bubble, Inc. acquires 15% of Riley Corporation on January 1, 2018, for $130,000 when the book value of Riley’s net assets was $760,000. During 2018 Riley reported a net income of $150,000 and paid dividends of $32,000. Riley has land that is undervalued by $30,000 on January 1, 2018. On January 1, 2019, Bubble purchased an additional 30% of Riley for $280,000, giving Bubble the ability to significantly influence the operating policies of Riley. During 2019, Riley reported a net income of $180,000 and paid dividends of $32,000. Riley’s land (Riley has only one piece of land) was undervalued by $32,000 on January 1, 2019. Any excess of cost over book value is attributable to Trademark which has a useful life of 8 years on January 1, 2018. During 2018 and 2019, there was no fair value adjustment for Riley (there were no changes in fair value). And during 2018 and 2019, there were no changes in net assets.

1) What is the balance of the investment account in Riley on December 31, 2018?

2) What journal entry does Bubble need to make December 31, 2018, regarding Riley’s dividends?

Accounts	Dr.	Cr.

3) In 2019, when Bubble acquired an additional 30% of Riley, Bubble needs to use the equity method retrospectively to record for investment in Riley. Calculate Trademark in 2018 that will be recorded in 2019 if any.

4) In 2019, calculate the annual amortization of Trademark in 2018.

5) In 2019, using the equity method, what is the balance of the investment account in Riley on December 31, 2018? Show your calculation (can show journal entries).

6) Calculate Trademark in 2019 acquisition that will be recorded in 2019 if any.

7) In 2019, calculate the annual amortization of Trademark in 2019.

8) What is the balance of the investment account in Riley on December 31, 2019? Show your calculation (can make journal entries).

Expert Solution

1 )130,000

2) Dr.Cash 4800

Cr.Dividend income 4,800

3 )Zero

4 )Zero

5) 140,000

01/19 Dr. Investment in equity 10,000

Cr. Unrealized gain - P/L 10,000

Dr. Investment in associate 140,000

Cr. Investment in equity 140,000

6)Zero

7) 3,333.33

8) 485,100

Explanation:

The purchase of 15% shares did not qualify as an investment in associate, therefore, the investment is to be measured using the fair value method. Since there is no adjustment to the fair value of the shares, the balance of the investment is equal to the original price of 130,000.
The dividend income is computed as follows: (32,000 x 15%) = 4,800
In using the equity method of accounting for investment in equity, the investor (buying company) should not recognize any asset (including intangible asset) from the transaction. The investor should account for his investment under the account title "investment in associate" or any similar account.
Bubble Inc. will not share in the amortization of the excess of fair value over book value of the trademark in 2018.
Under the equity method, any shares previously held by the investor should be revalued to its fair value on the date the investor gained significant influence to the investee. In the problem, there is no explicit fair value given on Jan 01, 2019. It is to be assumed that the price given for the additional shares purchased is equal to its fair value. The fair value of 2018 investment is computed as follows: (280,000/30%) x 15% = 140,000.
See explanation for item no. 3.

ekkarill92 answered 2 years ago

Jones, Incorporated acquires 15% of Anderson Corporation on January 1, 2020, for $105,000 when the book...

Jones, Incorporated acquires 15% of Anderson Corporation on January 1, 2020, for $105,000 when the book value of Anderson was $600,000. During 2020 Anderson reported net income of $150,000 and paid dividends of $50,000. On January 1, 2021, Jones purchased an additional 25% of Anderson for $200,000. Any excess cost over book value is attributable to goodwill with an indefinite life. The fair-value method was used during 2020 but Jones has deemed it necessary to change to the equity method...

ABC, Inc. acquired 15% of EFG Corporation on January 1, 2019, for $125,000 when the book...

ABC, Inc. acquired 15% of EFG Corporation on January 1, 2019, for $125,000 when the book value of EFG's net assets was $950,000. During 2019, EFG reported net income of $530,000 and paid dividends of $40,000. On January 1, 2020, ABC purchased an additional 15% of EFG for $550,000. Any excess of cost over book value was attributable to goodwill (No amortization). On that same date, ABC changed to the equity method. During 2020, EFG reported net income of $730,000...

Myka, Inc. acquired 15% of Pete Corporation on January 1, 2017, for $125,000 when the book...

Myka, Inc. acquired 15% of Pete Corporation on January 1, 2017, for $125,000 when the book value of Pete’s net assets was $950,000. During 2017, Pete reported net income of $530,000 and paid dividends of $40,000. On January 1, 2018, Myka purchased an additional 15% of Pete for $550,000. Any excess of cost over book value was attributable to goodwill (No amortization). On that same date, Myka changed to the equity method. During 2018, Pete reported net income of $730,000...

Arm, Inc. acquired 15% of Waist Corporation on January 1, 2017, for $410,000 when the book...

Arm, Inc. acquired 15% of Waist Corporation on January 1, 2017, for $410,000 when the book value of Waist’s net assets was $1,050,000. During 2017, Waist reported net income of $230,000 and paid dividends of $90,000. On January 1, 2017, Arm purchased an additional 25% of Waist for $510,000. Any excess of cost over book value was attributable to goodwill (No amortization). On that same date, Arm changed to the equity method. During 2018, Waist reported net income of $480,000...

On January 1, 2020, Flounder Company acquires $130,000 of Spiderman Products, Inc., 9% bonds at a...

On January 1, 2020, Flounder Company acquires $130,000 of Spiderman Products, Inc., 9% bonds at a price of $120,632. Interest is received on January 1 of each year, and the bonds mature on January 1, 2023. The investment will provide Flounder Company a 12% yield. The bonds are classified as held-to-maturity. (a) Prepare a 3-year schedule of interest revenue and bond discount amortization, applying the straight-line method. (Round answers to 0 decimal places, e.g. 2,500.) Schedule of Interest Revenue and...

JLB Enterprises acquired 15% of REB Corporation on January 1, 2020, for $63,000 when the book...

JLB Enterprises acquired 15% of REB Corporation on January 1, 2020, for $63,000 when the book value of REB’s net assets was $360,000. During 2020, REB reported net income of $90,000 and paid dividends of $30,000. On January 1, 2021, JLB purchased an additional 25% of REB for $240,000. Any excess of cost over book value was attributable to goodwill (No amortization). On that same date, JLB changed to the equity method. During 2021, REB reported net income of $120,000...

Plover Corporation acquired 80% of Sink Inc. equity on January 1, 2013, when the book values...

Plover Corporation acquired 80% of Sink Inc. equity on January 1, 2013, when the book values of Sink's assets and liabilities were equal to their fair values. The cost of the investment was equal to 80% of the book value of Sink's net assets. Plover separate income (excluding Sink) was $1,800,000, $1,700,000 and $1,900,000 in 2013, 2014 and 2015 respectively. Plover sold inventory to Sink during 2013 at a gross profit of $48,000 and one quarter remained at Sink at...

2. Abbey, Inc. acquired 15% of Tulsa Corporation on January 1, 2016, for $210,000 when the...

2. Abbey, Inc. acquired 15% of Tulsa Corporation on January 1, 2016, for $210,000 when the book value of Tulsa’s net assets was $950,000. During 2016, Tulsa reported net income of $330,000 and paid dividends of $70,000. On January 1, 2017, purchased an additional 25% of Tulsa for $350,000. Any excess of cost over book value was attributable to goodwill (No amortization). On that same date, Abbey changed to the equity method. During 2017, Tulsa reported net income of $420,000...

On January 1, 2016, Asure Corporation acquires the net assets of BlueBox Inc. and records the...

On January 1, 2016, Asure Corporation acquires the net assets of BlueBox Inc. and records the acquisition as a merger. Asure/s acquisition entry looks like this (amounts in thousands): General Journal Description Debit Credit Current assets 12,000 Plant and equipment 40,000 Identiﬁable intangibles 80,000 Goodwill 700,000 Notes payable 100,000 Cash 700,000 Earnings contingency liability 32,000 Brand names and customer lists comprise the identifiable intangibles. Required For each of the following independent situations, prepare Asure's journal entry, if any, to record...

Plaza, Inc., acquires 80 percent of the outstanding common stock of Stanford Corporation on January 1,...

Plaza, Inc., acquires 80 percent of the outstanding common stock of Stanford Corporation on January 1, 2018, in exchange for $960,400 cash. At the acquisition date, Stanford’s total fair value, including the noncontrolling interest, was assessed at $1,200,500. Also at the acquisition date, Stanford's book value was $511,000. Several individual items on Stanford’s financial records had fair values that differed from their book values as follows: Book Value Fair Value Tradenames (indefinite life) $ 267,600 $ 391,500 Property and equipment...