In: Accounting
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.
SOLUTION
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)