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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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