On January 1, 2019, Flying Ace Inc. purchases 20% of Red Baron Aviation for $200,000. Flying...

On January 1, 2019, Flying Ace Inc. purchases 20% of Red Baron Aviation for $200,000. Flying Ace can exert significant influence over Red Baron (the investee) therefore it uses the equity method to account for the investment. On the date of acquisition, Red Baron holds net assets with a book value of $700,000. Flying Ace believes that the investee’s building (10-year remaining useful life and no salvage value) is undervalued on Red Baron’s books by $80,000 and equipment (5-year remaining useful life and no salvage value) is undervalued by $120,000. Any goodwill established by this purchase is considered to have an indefinite useful life. During 2019, Red Baron reports net income of $150,000 and at year-end declares a cash dividend of $60,000. Prepare all the entries related to this investment for 2019.

Hint: There should be goodwill.

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ekkarill92 answered 1 year ago

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