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Albert Company has an investment in the voting shares of Prince Ltd. On December 31, Year...

Albert Company has an investment in the voting shares of Prince Ltd. On December 31, Year 5, Prince reported a net income of $860,000 and declared dividends of $200,000. During Year 5, Albert had sales to Prince of $915,000, and Prince had sales to Albert of $500,000. On December 31, Year 5, the inventory of Albert contained an after-tax intercompany profit of $40,000, and the inventory of Prince contained an after-tax intercompany profit of $72,000. On January 1, Year 4, Albert sold equipment to Prince and recorded an after-tax profit of $120,000 on the transaction. The equipment had a remaining useful life of five years on this date. Albert uses the equity method to account for its investment in Prince. Required Prepare Albert’s Year 5 equity method journal entries under each of the following two assumptions:

(a) Albert owns 64% of Prince, and Prince is a subsidiary.

(b) Albert owns 30% of Prince, and Prince is a joint venture.

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Unrealized profits                                                                                            After tax

   Closing inventory – Prince selling                                                                      40,000

– Albert selling                                                                      72,000

Equipment Jan. 1, Year 4 – Albert selling                                                           120,000

Amount realized annually through depreciation

(120,000 / 5 years)                                                                                              24,000

(a) Albert owns 64% of Prince (a subsidiary)

Investment in Prince (64% × 860,000)                                        550,400

   Investment income                                                                                      550,400

Year 5 net income

Dividends receivable (64% × 200,000)                                       128,000

   Investment in Prince                                                                                   128,000

Year 5 dividends declared but not received

Investment income (64% × 40,000)                                              25,600

   Investment in Prince                                                                                     25,600

Unrealized closing inventory profit – Prince selling

Investment income                                                                        72,000

   Investment in Prince                                                                                     72,000

Unrealized closing inventory profit – Albert selling

Investment in Prince                                                                      24,000

   Investment income                                                                                        24,000

Equipment profit realized in Year 5 – Albert selling

(b) Albert owns 30% of Prince (a joint venture)

Investment in Prince (30% × 860,000)                                        258,000

   Investment income                                                                                      258,000

Year 5 net income

Dividends receivable (30% × 200,000)                                         60,000

   Investment in Prince                                                                                     60,000

Year 5 dividends declared but not received

Investment income (30% × 40,000)                                              12,000

   Investment in Prince                                                                                     12,000

Unrealized closing inventory profit – Prince selling

Investment income (30% × 72,000)                                              21,600

   Investment in Prince                                                                                     21,600

Unrealized closing inventory profit – Albert selling

   (Note: 70% is realized selling to the other venturers)

Investment in Prince (30% × 24,000)                                              7,200

   Investment income                                                                                          7,200

Equipment profit realized in Year 5 – Albert selling

   (70% is realized selling to other venturers)

ekkarill92 answered 2 years ago
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