Question

Milani, Inc., acquired 10 percent of Seida Corporation on January 1, 2020, for $186,000 and appropriately accounted for the investment using the fair-value method. On January 1, 2021, Milani purchased an additional 30 percent of Seida for $615,000 which resulted in significant influence over Seida. On that date, the fair value of Seida's common stock was $2,050,000 in total. Seida’s January 1, 2021, book value equaled $1,900,000, although land was undervalued by $134,000. Any additional excess fair value over Seida's book value was attributable to a trademark with an eight-year remaining life. During 2021, Seida reported income of $319,000 and declared and paid dividends of $116,000.

Prepare the 2021 journal entries for Milani related to its investment in Seida.

1. Record acquisition of Seida stock.

2. Record the 40% income earned during period by Seida.

3. Record 2021 amortization for trademark excess fair value.

4. Record dividend declaration from Seida.

5. Record collection of dividend from investee.

Answer 1

Transaction	General Journal	Debit($)	credit($)
1	Investment in seida	615,000
	Cash		615,000
	(To record acquision of sierda stock)
2	Investment in sierda	127,600
	Equity income -investment in sierda($ 319,000*40%)		127,600
	(To record income for sierda)
3	Equity income -investment in sierda	800
	Investment in sierda		800
	(To record amortization)
4	dividends receivable	46,400
	Investment in sierda($116,000*40%)		46,400
	(To record dividends declaration from sierda)
5	cash	46,400
	Dividend receivable		46,400
	(To record collection of investee)

working:

purchase rice of 30%of sierda's stock. = $615,000

FV of original 10%investment in sierda

($2,050,000*10%) = $205,000

Total fairvalue of 40% investment in seida. = $820,000

Book value of seirda's stock(19,00,000*40%) = ($760,000)

Fair value in excess of book value. = $ 60,000

Excess cost assigned to undervalued land. = ($53,600)

(134,000*40%)

Trademark. = $6,400

Remaining life of trade mark. = 8 years

Annual amortization. = $800