Question
In: Accounting
In January 2014, Domingo, Inc., acquired 20 percent of the outstanding common stock of Martes, Inc.,...
In January 2014, Domingo, Inc., acquired 20 percent of the outstanding common stock of Martes, Inc., for $700,000. Martes’s assets on that date were recorded at $3,900,000 with liabilities of $900,000. Any excess of cost over book value of the investment was attributed to a patent having a remaining useful life of 10 years.
In 2014, Martes reported net income of $170,000. In 2015, Martes reported net income of $210,000. Dividends of $70,000 were declared in each of these two years.
USE GAAP
- Suppose this investment gave Domingo the ability to exercise significant influence over Martes. Prepare the necessary journal entries.
- Suppose this investment didn t give Domingo the ability to exercise significant influence over Martes. Prepare the necessary journal entries.
Solutions
Expert Solution
| 1.) | Signifciant Influence | |||
| Date | Account Titles & explanation | Debit $ | Credit $ | |
| January 2014. | Investment in Martes, Inc. | 700,000 | ||
| Cash | 700,000 | |||
| ( To record investment ) | ||||
| Dec.2014 | Investment in Martes, Inc. | 34,000 | ||
| Investment Revenue | 34,000 | |||
| (170,000 x 20% ) | ||||
| ( To record share of Net Income ) | ||||
| Dec.2014 | Cash ( 70,000 x 20% ) | 14,000 | ||
| Investment in Martes, Inc. | 14,000 | |||
| (To record receipt of dividend ) | ||||
| Dec.2014 | Investment Revenue | 2,000 | ||
| Investment in Martes, Inc. | 2,000 | |||
| (100,000 / 10 ) x 20% | ||||
| ( To record annual amortization of patent ) | ||||
| Dec.2015 | Investment in Martes, Inc. | 42,000 | ||
| Investment Revenue | 42,000 | |||
| (210,000 x 20% ) | ||||
| ( To record share of Net Income ) | ||||
| Dec.2015 | Cash ( 70,000 x 20% ) | 14,000 | ||
| Investment in Martes, Inc. | 14,000 | |||
| (To record receipt of dividend ) | ||||
| Dec.2015 | Investment Revenue | 2,000 | ||
| Investment in Martes, Inc. | 2,000 | |||
| (100,000 / 10 ) x 20% | ||||
| ( To record annual amortization of patent ) |
| Working | |||
| Amount $ | |||
| Purchase consideration | 700,000 | ||
| Less: Net Assets acquired | 600,000 | ||
| (3,900,000 - 900,000 ) x 20% | |||
| Amount attributable to patent | 100,000 | ||
| 2.) | No -Signifciant Influence | |||
| Date | Account Titles & explanation | Debit $ | Credit $ | |
| January 2014. | Investment in Martes, Inc. | 700,000 | ||
| Cash | 700,000 | |||
| ( To record investment ) | ||||
| Dec.2014 | Cash ( 70,000 x 20% ) | 14,000 | ||
| Dividend Revenue | 14,000 | |||
| (To record receipt of dividend ) | ||||
| Dec.2015 | Cash ( 70,000 x 20% ) | 14,000 | ||
| Dividend Revenue | 14,000 | |||
| (To record receipt of dividend ) | ||||
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