Question

On January 1, Year 1, Amco Ltd. and Newstar Inc. formed Bearcat Resources, a joint venture. Newstar contributed miscellaneous assets with a fair value of $1,440,000 for a 55% interest in the venture. Amco contributed plant and equipment with a carrying amount of $1,185,000 and a fair value of $1,640,000, and received a 45% interest in the venture plus $462,000 in cash. On December 31, Year 1, Bearcat reported a profit of $192,000 and declared a dividend of $87,000. Amco has a December 31 year-end and will account for its 45% interest using the equity method. (Assume a 20-year useful life for the plant and equipment.)

Required:

(a)

Assume that the miscellaneous assets contributed by Newstar included cash of $462,000. Also, assume that the transaction had commercial substance when Amco transferred the plant and equipment to the joint venture. Prepare Amco’s Year 1 journal entries. (Do not round intermediate calculations. Round final answers to the nearest whole dollar value.)

1. Record the investment and transfer of asset to Bearcat.

2. Record year 1 net income.

3. Record dividend income.

4. Record gain on transfer to Bearcat.

(b) Asume that there was no cash in the assets contributed by Newstar and that the cash received by Amco had been borrowed by Bearcat. Also, assume that the transaction did not have commercial substance when Amco transferred the plant and equipment to the joint venture. Prepare Amco’s Year 1 journal entries. (Do not round intermediate calculations. Round final answers to the nearest whole dollar value.)

1. Record the investment and transfer of asset to Bearcat.

2. Record year 1 net income.

3. Record dividend income.

4. Record gain on transfer to Bearcat.

Answer 1

A)

Particulars	Amount($)
Fair Value of Plant and Equipment Transferred	1640000
Less : Carrying Value on Amco's Books	(1185000)
Gain on Transfer to Joint Venture (Bearcat)	455000
Less : Amco's Portion 45% (unrealized)	(204750)
Newstar's Portion 55%	250250
Less : Recognized on transfer	(250250)
Recognized Later	0

Journal Entries :-

Date	Particulars	Debit($)	Credit($)
Jan 1	Cash A/c	462000
	Investment in Bearcat A/c ($1640000-$462000)	1178000
	Plant and Equipment A/c		1185000
	Unrealized Gain A/c		204750
	gain on transfer to Newstar A/c		250250
Dec 31	Investment in Bearcat A/c	86400
	Equity Earnings A/c ($192000*45%)		86400
Dec 31	Dividend Receivable A/c	39150
	Investment In Bearcat A/c ($87000*45%)		39150
Dec 31	Unrealized Gain A/c	10238
	Gain on Transfer to Newater A/c ($204750/20)		10238

B)

Particulars	Amount($)
Cash Received by Amco	462000
Less : Amco's Share of the borrowing (45%)	(207900)
Newstar's Share (55%)	254100
Less: Carrying Value Sold ($254100*($1185000/$1640000))	(183603)
Gain on transfer to Newstar	70497

Journal Entries :-

Date	Particulars	Debit($)	Credit($)
Jan 1	Cash A/c	462000
	Investment in Bearcat A/c ($1640000-$462000)	1178000
	Plant and Equipment A/c		1185000
	Unrealized Gain A/c		204750
	Gain on transfer to Newstar A/c		70497
	Deferred Gain on Newstar A/c ($250250-$70497)		179753
Dec 31	Investment in Bearcat A/c	86400
	Equity Earnings A/c ($192000*45%)		86400
Dec 31	Dividend Receivable A/c	39150
	Investment In Bearcat A/c ($87000*45%)		39150
Dec 31	Deferred Gain Newstar A/c	8988
	Gain on Transfer to Newater A/c ($179753/20)		8988
Dec 31	Unrealized Gain A/c	10238
	Gain on Transfer to Newater A/c ($204750/20)		10238