Question
In: Accounting
On January 4, 2016, Newcrest Gold Co. Ltd. paid $66 million for 3 million shares of...
On January 4, 2016, Newcrest Gold Co. Ltd. paid $66 million for 3 million shares of Austin Mining Company common stock. The investment represents a 30% interest in the net assets of Austin and gave Newcrest the ability to exercise significant influence over Austin’s operations. Newcrest uses the equity method to record the investment.
Newcrest received dividends of $1.60 per share on December 6, 2016, and Austin reported net income of $32 million for the year ended December 31, 2016. The market value of Austin’s common stock at December 31, 2016, was $23 per share. The book value of Austin’s net assets was $160 million and:
A. The fair market value of Austin’s depreciable assets, with an average remaining useful life of 8 years, exceeded their book value by $16 million.
B. The remainder of the excess of the cost of the investment over the book value of net assets purchased was attributable to goodwill.
Required:
1. Prepare all appropriate journal entries related to the investment during 2016.
2. What is the carrying amount of this investment on Newcrest's balance sheet as of December 31, 2016?
3. What's the effect of this investment on Newcrest's 2016 income before taxes?
Solutions
Expert Solution
1
| Account | Debit | Credit |
| Investment in Austin mining company | 66,000,000 | |
| Cash | 66,000,000 | |
| [Entry to record investment] | ||
| Investment in Austin mining company | 9,600,000 | |
| Equity in earnings from Austin mining company | 9,600,000 | |
| [Entry to record share of earnings] | ||
| Cash | 1,080,000 | |
| Investment in Austin mining company | 1,080,000 | |
| [Entry to record receipt of dividends] | ||
| Equity in earnings from Austin mining company | 600,000 | |
| Investment in Austin mining company | 600,000 | |
| [Entry to amortize share of excess fair value] | ||
2
| Particulars | Amount |
| Investment | 66,000,000 |
| Share of net income | 9,600,000 |
| Share of dividends | (1,080,000) |
| Depreciation | (600,000) |
| Closing balance | 73,920,000 |
3
| Income statement | Amount |
| Share of net income | 9,600,000 |
| Depreciation | (600,000) |
| Net impact | 9,000,000 |
Net income increases by 9 million.
Amount of fair value amortization arrived as below:
| Excess fair value | 16,000,000 |
| Remaining life | 8 |
| Amortization per year | 2,000,000 |
| Share | 600,000 |
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