In: Accounting
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 |