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In: Accounting

On January 2, 2018, Johnson Company paid $310 million to acquire 14,000,000 shares of Pets Corp....


On January 2, 2018, Johnson Company paid $310 million to acquire 14,000,000 shares of Pets Corp. The investment represented 30% of the total shares outstanding of Pets Corp. and gave Johnson Company the ability to exert significant influence upon the operations of Pets Corp. During the year ended December 31, 2018, Pets Corp. paid dividends of $1.10 per share (declared and paid on November 12, 2018) and reported income of $245 million. The market value of Pets Corp. stock at December 31, 2018, was $24.50 per share. On the date of the acquisition the book value of Pets Corp. was $950 million and the fair value of the assets at that time were consistent with the book value except for Equipment which was undervalued by $40.0 million, with a remaining life of 10 years. Any excess fair value attributable to the acquisition (over cost of acquisition) was applied to goodwill.

Part A: Prepare all journal entries related to the investment for 2018, assuming Johnson uses the equity method to account for acquisition.

Show your work representing the development and allocation of the consideration paid.

Part B: Prepare all appropriate journal entries related to the investment for 2018, assuming that the purchase of the 14,000,000 shares only represented 10% of the outstanding stock of Pets Corp. and Johnson uses the fair value method to account for the acquisition. Keep in mind the new rules associated with investments in stock instruments – must be treated as trading securities, effective 2018.

Note: I only need help with Part B.

Solutions

Expert Solution

Date Account Debit Credit
Jan.2 Investment in trading securities        31,00,00,000
Bank        31,00,00,000
[Trading securities purchased]
Dec.31 Unrealised holding gain on trading securities                            -            3,30,00,000
Investment in trading securities          3,30,00,000                            -  
[Year end fair value adjustment]
Nov.2 Bank          1,54,00,000
Dividend income          1,54,00,000
[Dividends received]

ekkarill92 answered 2 years ago
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