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In: Accounting

On March 1, 2020, the XYZ Company acquired 40% of the voting stock of KLM Company...

  1. On March 1, 2020, the XYZ Company acquired 40% of the voting stock of KLM Company for 6 million. The net worth of KLM book value is 10 million. The fair market value of the KLM assets and liabilities are equal except for a building with book value of 3 million has a fair value of 5 million.

KLM reported net income of 2 million and made dividend distributions of 1 million during the year ending 12/31/2020

Assuming XYZ is using the EQUITY METHOD for this investment

  1. Was there any good will in this transaction? How much?
  2. Make the journal entries to reflect the above transactions by XYZ company during 2020
  3. Assume XYZ uses straight line depreciation and 10 years economic life. Show the general ledger of “Investment” account and ending balance by XYZ company on 12/31/2020

Solutions

Expert Solution

a. Goowill is the difference between the amount invested and the value in the books

Investment made = 6 million

Proportionate Book Value = 10 million * 40% = 4 million

Goodwill = 6 milion - 4 million = 2 million

b. Journal Entries for the transations made during the year 2020

  • Equity method investment A/c------------------Dr 6 million

To Cash A/c 6 million

(Being investment made)

  • Equity method investment A/c------------------Dr 0.80 million To Equity method income A/c 0.80 million (Being share of net income recorded)
  • Cash A/c.....................................................Dr 0.40 milliom To Equity method investment A/c 0.40 million   (Being dividend received accounted)

c. Investment account for the year ended December 31, 2020

Particulars Amount($) Particulars Amount($)

To Cash 6 million By Cash 0.40 million

To Equity method income 0.80 million By Balance C/d 6.40 million

6.80 million 6.80 million

ekkarill92 answered 2 years ago
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