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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).

Solutions

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

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