Question
In: Accounting
On July 1, 2018, Gupta Corporation bought 30% of the outstanding common stock of VB Company...
On July 1, 2018, Gupta Corporation bought 30% of the outstanding
common stock of VB Company for $170 million cash. At the date of
acquisition of the stock, VB’s net assets had a total fair value of
$490 million and a book value of $220 million. Of the $270 million
difference, $50 million was attributable to the appreciated value
of inventory that was sold during the last half of 2018, $160
million was attributable to buildings that had a remaining
depreciable life of 10 years, and $60 million related to equipment
that had a remaining depreciable life of 5 years. Between July 1,
2018, and December 31, 2018, VB earned net income of $60 million
and declared and paid cash dividends of $50 million.
Required:
1. Prepare all appropriate journal entries related
to the investment during 2018, assuming Gupta accounts for this
investment by the equity method. Already did
correctly.
2. Determine the amounts to be reported by
Gupta.***** (This is still wrong when I do it). ?? Please
help.
| investment in Gupta's 2018 balance sheet | |
| investment revenue (loss) in Gupta's 2018 income statement | |
| investing activities in Gupta's 2018 statement of cash flows |
Solutions
Expert Solution
| Cost of purchase | 170 M |
| Fair Value (490 M x 30%) | 147 M |
| Book Value (220 M x 30%) | 66 M |
| Excess | 81 M |
| Attributable to: | |
| Inventory (30% x 50 M):-15 M | |
| Building (30% x 160 M): 48 Million | |
| Equipment (30% x 60 M): 18 million | |
| Goodwill (170 Million- 147 Miliion) | 23 M |
| 1. Journal Enty | |||
| S. No. | Account Tittle | Debit | Credit |
| Purchase | |||
| 1 | Investment in VB Shares | $170,000,000 | |
| Cash | $170,000,000 | ||
| Net Income | |||
| 2 | Investment in VB Shares (30% x $60 million) | $ 18,000,000 | |
| Investment Revenue | $ 18,000,000 | ||
| Dividends | |||
| 3 | Cash (30% x 50 million) | $ 15,000,000 | |
| Investment in VB Shares | $ 15,000,000 | ||
| Inventory, Building & Equipment | |||
| 4 | Investment Revenue* | $ 23,400,000 | |
| Investment in VB Shares | $ 23,400,000 | ||
| * | Inventory (30% x 50 million)= | 15 million |
| Building [(30% x 160 million) ÷ 10 years] | 4.8 million | |
| Equipment [(30% x 60 million) ÷ 5 years) | 3.6 million | |
| 23.4 million |
| 1. Journal Enty | |||
| S. No. | Account Tittle | Debit | Credit |
| Purchase | |||
| 1 | Investment in VB Shares | $170,000,000 | |
| Cash | $170,000,000 | ||
| Net Income | |||
| 2 | Investment in VB Shares (30% x $60 million) | $ 18,000,000 | |
| Investment Revenue | $ 18,000,000 | ||
| Dividends | |||
| 3 | Cash (30% x 50 million) | $ 15,000,000 | |
| Investment in VB Shares | $ 15,000,000 | ||
| Inventory, Building & Equipment | |||
| 4 | Investment Revenue* | $ 23,400,000 | |
| Investment in VB Shares | $ 23,400,000 | ||
| * | Inventory (30% x 50 million)= | 15 million |
| Building [(30% x 160 million) ÷ 10 years] | 4.8 million | |
| Equipment [(30% x 60 million) ÷ 5 years) | 3.6 million | |
| 23.4 million |
| 2.a. As an investment in the balance sheet: | ||
| Investment in VB Shares ($ in millions) | ||
| Cost | 170 | |
| Share of income | 18 | |
| Less: | ||
| Dividends | 15 | |
| adjustment for inventory | 15 | |
| Depreciation adjustment for building | 4.8 | |
| Depreciation adjustment for equipment | 3.6 | 38.4 |
| Balance | 149.6 | |
| b. As investment revenue (loss)in the income statement: | |
| $18 million - [$15 + 4.8 + 3.6] million = -$5.4 million |
| c. In the statement of cash flows (direct method): | |
| • Investing activities: $170 million cash outflow | |
| • Operating activities: $15 million cash inflow | |
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