Question

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On January 3, 2018, Matteson Corporation acquired 40 percent of the outstanding common stock of O’Toole...

On January 3, 2018, Matteson Corporation acquired 40 percent of the outstanding common stock of O’Toole Company for $1,379,000. This acquisition gave Matteson the ability to exercise significant influence over the investee. The book value of the acquired shares was $863,000. Any excess cost over the underlying book value was assigned to a copyright that was undervalued on its balance sheet. This copyright has a remaining useful life of 10 years. For the year ended December 31, 2018, O’Toole reported net income of $353,000 and declared cash dividends of $35,000.The fair value of the O'Toole Company stock on December 31, 2018 was $1,410,000.

Requirements:

1.

How much of Matteson's consideration for O'Toole is attributable to revaluation increments and decrements and goodwill or gain on bargain purchase?  (Enter negative numbers preceded by a minus sign.)

2. Prepare all of the journal entries for Austin regarding their investment in McKenzie Corporation stock using the equity method.

3. At December 31, 2015, what should Matteson report as its investment in O’Toole under the equity method?

4. Prepare all of the journal entries for Austin regarding their investment in McKenzie Corporation stock using the fair-value option.

5. At December 31, 2015, what should Matteson report as its investment in O’Toole under the fair value option?

6. How much of Matteson's consideration for O'Toole is attributable to revaluation increments and decrements and goodwill or gain on bargain purchase?

Solutions

Expert Solution

1.

Out of the Matteson's consideration $516,000 is for revalueation increment in respect of copyright. There is no payment for Goodwill.

Purchase price paid 1379000
Book value of the shares acquired 863000
Excess paid 516000
This excess is for copyright which is undervalued.

2.

1. Journal entries in the books Of Matteson Corp.
Date Account title Debit Credit
Jan.3, 2018 Investment in O'Toole Company 1379000
Cash 1379000
(Payment made for 40% interest in O'Toole Co.)
Dec.31, 2018 Amortization expense 51600
Investment in O'Toole Company 51600
(Amortization of revaluation increments in respect
Dec.31, 2018 Investment in O'Toole Company 141200
Equity Income from O'Toole Co. 141200
(40% interest in the net income of O'Toole for the year)
Dec.31, 2018 Cash 14000
Investment in O'Toole Company 14000
(Dividend received from O'Toole 40% of $35,000)

3. the date should be December31, 2018 and not December31, 2015 as mentioned in the question.

The balance of Investment in O'Toole Co. account is $1,454,600.

Price paid for 40% interest on Jan.3, 2018 1379000
Amortization of excess paid for copyright -51600
Equity income from O'Toole 141200
Dividend received for the year ended December31, 2018 -14000
Balance of investment in O'Toole acount as at Dec.31,2018 1454600

4.

As per the information given The value of the stock of O'Toole Co. as at Dec.31, 2018 $1.410,000

40% interest of this =$564,000

That means there is a reduciton of the value of investment by $815,000.($1,379,000 - $564,000)

4. Journal entries in the books Of Matteson Corp.
Date Account title Debit Credit
Jan.3, 2018 Investment in O'Toole Company 1379000
Cash 1379000
(Payment made for 40% interest in O'Toole Co.)
Dec.31, 2018 Amortization expense 51600
Investment in O'Toole Company 51600
(Amortization of revaluation increments in respect
Dec.31, 2018 Cash 14000
Divided income 14000
(Dividend received from O'Toole 40% of $35,000)
Dec.31, 2018 Unrealized loss on investment in O'Toole Co. 815000
Investment in O'Toole Company 815000
(Reduction in the value of the investment )

5. The value of investment under fair value option is $564,000.

ekkarill92 answered 2 years ago
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