Question

Marie Inc. and Nick Inc. formed a joint venture on January 1, 2016 to produce and sell custom-fit earphones and earplugs. Marie invested plant and equipment with a book value of $250,000 and a fair value of $400,000 for a 25% interest in the venture which was to be called Jola Inc. Nick Inc. contributed raw materials (i.e. silicone and packing materials) with a fair value of $650,000 and cash of $550,000 for its 75% stake in Jola Inc. Jola Inc. reported net income of $2,200,000 for 2016. Marie Inc.’s plant and equipment has a 5 year remaining life as of January 1, 2016. Ignore income taxes.

What is the amount of the gain or loss that Marie Inc. can recognize on January 1, 2016 arising from the transfer of its assets to Jola Inc.? Provide the journal entry that Marie Inc. will record for 2016 to reflect its share of Jola Inc.’s net income

Answer 1

Marie invested Plant & equipment in Jola Inc.'s having book value of $ 250,000 whose fair value (Market Value) is $ 400,000

So the difference between the book value and fair value is the profit of the Marie Inc.

Book Value means that Marie Inc has $250,000 value of the assets in its balance sheet but as per market the value of such plant and machinery is $ 400,000 that means If Marie Inc wants to sell that plant & equipment in the current market conditions then it will get $400,000 against its book value of 250,000 i.e at a profit of $ 150,000.

So the profit of Marie Inc. is $ 150,000

Marie Inc has 25% shareholding in Jola Inc.

or

Marie Inc has 25% investment in Jola Inc

If Jola Inc is in profit (net income) then value of Investment increases. Means the Marie Inc investment value increases by 25%.

or

If Jola Inc is in loss then value of Investment decreases. Means the Marie Inc investment value decreases by 25%.

Income of Jola Inc is $ 2,200,000

Marie Inc share in Jola Inc is 25% of $ 2,200,000 i.e $ 550,000

Our investment value and income increases

Journal entry that Marie Inc recorded in 2016 is:

		Amount
Investment in Jola Inc's Account	Dr	5,50,000
To Income	Cr	5,50,000

(being Investment income recorded)