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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

  1. Suppose this investment gave Domingo the ability to exercise significant influence over Martes. Prepare the necessary journal entries.
  2. 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 )

ekkarill92 answered 1 year ago
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