Question
In: Accounting
On July 1, 2018, Gupta Corporation bought 20% of the outstanding common stock of VB Company...
On July 1, 2018, Gupta Corporation bought 20% of the outstanding common stock of VB Company for $110 million cash. At the date of acquisition of the stock, VB’s net assets had a total fair value of $500 million and a book value of $290 million. Of the $210 million difference, $46 million was attributable to the appreciated value of inventory that was sold during the last half of 2018, $130 million was attributable to buildings that had a remaining depreciable life of 10 years, and $34 million related to equipment that had a remaining depreciable life of 5 years. Between July 1, 2018, and December 31, 2018, VB earned net income of $60 million and declared and paid cash dividends of $40 million. Required: 1. Prepare all appropriate journal entries related to the investment during 2018, assuming Gupta accounts for this investment by the equity method. 2. Determine the amounts to be reported by Gupta.
Solutions
Expert Solution
| Part 1 | ||||
| Date | Account Titles and Explanation | Debit | Credit | W.N |
| 01-07-2018 | Investment in Company V Shares | 11,00,00,000 | ||
| Cash | 11,00,00,000 | |||
| To record purchase of investment | ||||
| 31-12-2018 | Investment in Company LC Shares | 1,20,00,000 | =60000000*20% | |
| Investment Revenue | 1,20,00,000 | |||
| To record shares of net income as revenue from Investment | ||||
| 31-12-2018 | Cash | 80,00,000 | = 40000000*20% | |
| Investment in Company LC Shares | 80,00,000 | |||
| To record receipt of dividends | ||||
| 31-12-2018 | Investment Revenue | 1,11,80,000 | W.N 3 | |
| Investment in Company V Shares | 1,11,80,000 | |||
| To record amortization adjustment |
| W.N 3 | ||
| Details Amount | Amount | Calculation |
| Share of investor in fair value of investee’s net assets | 10,00,00,000 | =(500*20%)*1000000 |
| Share of investor in book value of investee’s net assets | 5,80,00,000 | =(290*20%)*1000000 |
| Difference of depreciable net assets | 4,20,00,000 | |
| Amount attributed to inventory | 92,00,000 | =(46*20%)*1000000 |
| Amount attributed t building | 2,60,00,000 | =(130*20%)*1000000 |
| Deprecation of Building | 13,00,000 | =26000000/10*6/12 |
| Amount attributed to equipment | 68,00,000 | =(34*20%)*1000000 |
| Depreciation of Equipment | 6,80,000 | =6800000/5*6/12 |
| Total Amortization | 1,11,80,000 | =9200000+1300000+680000 |
| Part 2 | |||
| Investment in Company V Shares | |||
| Details | Debit | Details | Credit |
| Cost | 11,00,00,000 | Dividends | 80,00,000 |
| Share of Income | 1,20,00,000 | Depreciation | 1,11,80,000 |
| Total | 12,20,00,000 | Total | 1,91,80,000 |
| Balance | 10,28,20,000 | ||
| Investment Revenue | |||
| Details | Debit | Details | Credit |
| Depreciation | 1,11,80,000 | Share of Income | 1,20,00,000 |
| Total | 1,11,80,000 | Total | 1,20,00,000 |
| Balance | 8,20,000 | ||
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