Question

Milani, Inc., acquired 10 percent of Seida Corporation on January 1, 2017, for $187,000 and appropriately accounted for the investment using the fair-value method. On January 1, 2018, Milani purchased an additional 30 percent of Seida for $640,000 which resulted in significant influence over Seida. On that date, the fair value of Seida's common stock was $2,060,000 in total. Seida's January 1, 2018 book value equaled $1,910,000, although land was undervalued by $132,000. Any additional excess fair value over Seida's book value was attributable to a trademark with an 8-year remaining life. During 2018, Seida reported income of $258,000 and declared and paid dividends of $101,000. Prepare the 2018 journal entries for Milani related to its investment in Seida.

Answer 1

Date	Particulars	Debit	credit
January 21,2018	Investment in seida	$640,000
	To cash		$640,000
	[being additional investment made]
December 31,2018	Investment in seida	$103,200
	To Equity income -investment in seida		$103,200
	[being share of net income recorded][258,000*40%]
December 31,2018	cash	$40,400
	To Investment in seida		$40,400
	[being dividend received 101,000*40%]
December 31,2018	Equity income -Investment in seida	$3,650
	To Investment in seida		$3,650
	[being annual amortization of trademark ]

Purchase cost of new investment	$640,000
fair value of 10% investment [$2,060,000*10%]	$206,000
Total fair value of investment	$846,000
Less: Book value of investment [$1,910,000*40%]	($764,000)
excess of fair value over book value	$82,000
Less: value assigned to undervalued land [$132,000*40%]	($52,800)
Trademark	$29,200

Amortization : $29,200/8 = $3,650