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James acquired 40% of the outstanding voting shares of Schott Co. on January 1, 2015 for...

James acquired 40% of the outstanding voting shares of Schott Co. on January 1, 2015 for $210,000 in cash when Schott’s owners’ equity was $400,000. One of the company’s buildings, that had a 20-year remaining life, was worth $100,000, even though its net book value was $60,000. Schott also had an unrecorded patent having a value of $85,000 that had a 10-year life. In 2015, Schott recorded net income of $60,000 and distributed a total cash dividend of $12,000. Its fortunes changed in 2016 when it recorded a $40,000 net loss, but the Board still paid $10,000 in dividends. This was a strategic investment and James began purchasing inventory from Schott right away. In 2015, Schott sold inventory with an original cost of $60,000 to James for $90,000. James had $15,000 of these goods in inventory (at the selling price) at December 31, 2015, but it was all sold in 2016. In 2016, Schott sold another $80,000 of inventory to James and had a gross profit on the sale of 37.5%. All but 30% of this was sold to third parties during the year.

Required: 1. Record the entries James needs in 2015 and 2016 in conjunction with this investment. 2. What is the balance in the investment account at December 31, 2016?

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Working-1
Consideration Paid $     210,000
Book Value 400000*40% $     160,000
Excess Consideration Paid $       50,000
Allocation:
Remaining Life Amortization
Building (100000-60000)*40% $       16,000 20 Year $              800
Patent 85000*40% $       34,000 10 Year $          3,400
Working-2
Inventoyr at the end of 2015 $       15,000
Gross Profit Percentage (90000-60000)/90000 33.33%
Gross Profit in Inventory $         5,000
James share 40%
Intra Entity Gross profit to be deferred $         2,000
Working-2
Inventoyr at the end of 2016 80000*30% $       24,000
Gross Profit Percentage Given 37.50%
Gross Profit in Inventory $         9,000
James share 40%
Intra Entity Gross profit to be deferred $         3,600
Part 1 Journal Entries
Date Account Debit Credit
Jan 1 2015 Investment in Schott Co $                     210,000
     Cash $     210,000
(initial investment recorded)
During 2015 Cash $                         4,800
     Investment in Schott Co $         4,800
(dividend received) 12000*40%
Dec 31 2015 Investment in Schott Co $                       24,000
     Equity Income from Schott $       24,000
(being income recorded from schott) 60000*40%
Dec 31 2015 Equity Income from Schott $                             800
     Investment in Schott Co $            800
(Building amortization recorded) Working-1
Dec 31 2015 Equity Income from Schott $                         3,400
     Investment in Schott Co $         3,400
(patent amortization recorded) Working-1
Dec 31 2015 Equity Income from Schott $                         2,000
     Investment in Schott Co $         2,000
(to defer intra entity profit in inventoyr) Working-2
During 2016 Cash $                         4,000
     Investment in Schott Co $         4,000
(dividend received) 10000*40%
Dec 31 2016 Equity Income from Schott $                       16,000
     Investment in Schott Co $       16,000
(being loss recorded from schott) 40000*40%
Dec 31 2016 Equity Income from Schott $                             800
     Investment in Schott Co $            800
(Building amortization recorded) Working-1
Dec 31 2016 Equity Income from Schott $                         3,400
     Investment in Schott Co $         3,400
(patent amortization recorded) Working-1
Dec 31 2016 Equity Income from Schott $                         3,600
     Investment in Schott Co $         3,600
(to defer intra entity profit in inventoyr) Working-3
Part 2
Initial Investment $     210,000
Less: Dividend during 2015 $        -4,800
Add: Income during 2015 $       24,000
Less: Amortization 2015-Building $           -800
Less: Amortization 2015-Patent $        -3,400
Less: Intra Profit 2015 $        -2,000
Less: Dividend during 2016 $        -4,000
Add: Loss during 2016 $     -16,000
Less: Amortization 2016-Building $           -800
Less: Amortization 2016-Patent $        -3,400
Less: Intra Profit 2016 $        -3,600
Balance as on Dec 31 2016 $     195,200

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