Question

On January 1, 2020, Jordan Inc. purchased 30% of the outstanding common stock of Melody Corporation at a cost of $600,000. Melody Corporation had 800,000 shares of common stock outstanding. At the date of purchase, the book value of Melody’s net assets was $1,500,000. Book value and fair value of net assets were the same for all balance sheet items except for machinery and inventory. The fair value exceeded the book value by $200,000 for machinery and $50,000 for the Inventory.

The estimated useful life of machinery is 15 years and all inventory acquired was sold during 2020.   Both companies have a January through December fiscal year. Melody Corporation reported net income of $250,000 and paid cash dividend of $80,000 during 2020. Market value of Melody Corporation was $2.50 per share at December 31, 2020.

1- Prepare the entry to record the original investment in Mountain.

2-Compute the amount of goodwill (if any) on the acquisition.

3-Prepare the necessary entries (other than acquisition) for 2020.

4-Assume that on January 10, 2020 Jordan Inc. sold 50% of its investment in Melody Corporation for $290,000. Prepare the journal entry to record the sale of investment.

5-Assume that subsequent to selling 50% of the investment, Melody Corporation reported income of $300,000 and paid dividend of $100,000 for 2021. Market value of Melody Corporation’s common stock was $3 per share at December 31, 2021. Prepare the journal entries (if any) for Jordan Inc. for its investment in Melody Corporation for 2021.

Answer 1

Answer (1):-
JOURNAL VOUCHER
DATE	ACCOUNT TITLE & EXPLANATION	DEBIT($)	CREDIT($)
01/01/2020	Investment in equity shares of melody corporations	600,000
	Cash		600,000
	(To record investment in equity shares of melody corporation as per equity method)

Answer (2):-
Computation of goodwill:-
Particulars	Amount($)
Purchase price	600,000
Less: Prorate book value of net assets (1,500,000*30%)	450,000
Excess of purchase price	150,000
Less: Excess of machinery over book value ($200,000*30%)	60,000
Less: Excess of Inventory over book value($50,000*30%)	15,000
Goodwill	75,000

Answer (3):-
JOURNAL VOUCHER
DATE	ACCOUNT TITLE & EXPLANATION	DEBIT($)	CREDIT($)
31/12/2020	Investment in equity shares of melody corporations	71,000
	Share of profit in associate($250,000*30%)		71,000
	(To record share in net income of assosiate at the end of year to the extent of 30%)(see the working)
31/12/2020	Cash ($80,000*30%)	24,000
	Investment in equity shares of melody corporations		24,000
	(to record the dividend on equity share purchase at melody corporation at $0.1 per share)
	Compuration of net income to be recognised
	Particulars	Amount($)
	Total net income of Melody Corporation	250,000
	% of share purchased	30%
	Share of net income	75,000
	Less: Additional depreciation of machinery($60,000/15)	4,000
	Share of net income	71,000
	Investment to be shown at statement of financial position
	Particulars	Amount($)
	Purchase Price	600,000
	ADD: Share of net income	71,000
	Less: Dividend received	24,000
	Value of investment	647,000

Answer (4):-
JOURNAL VOUCHER
DATE	ACCOUNT TITLE & EXPLANATION	DEBIT($)	CREDIT($)
10/1/2020	Cash	290,000
	Loss on sale of investment	10,000
	Investment in equity shares of melody corporations		300000
	(to record sale of investemnt entry)