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.
2. Determine the amounts to be reported by Gupta.
(amounts in millions)
| Journal | Debit | Credit | |
| 1 | Investment in VB Shares | 170m | |
| Cash | 170m | ||
| 2 | Investment in VB Shares | ??? | |
| Investment Revenue | ??? | ||
| 3. | Cash | 15m | |
| Investment in VB Shares | 15m | ||
| 4 | Investment Revenue | ??? | |
| Investment in VB Shares | ??? |
| a Investment in Gupta's balance sheet | |
| b. investment revenue (loss) in Gupta's 2018 income statement | |
| c. investing activities in Gupta's 2018 statement of cash flows |
Solutions
Expert Solution
Journal entries for investment in VB Company
| Journal | Debit | Credit | |
| 1 | Investment in VB Shares | 170m | |
| Cash | 170m | ||
| 2 | Investment in VB Shares | 18M | |
| Investment Revenue | 18M | ||
| 3. | Cash | 15m | |
| Investment in VB Shares | 15m | ||
| 4 | Investment Revenue | 3M | |
| Investment in VB Shares |
3M |
a Investment in Gupta's balance sheet
Investment in Gupta's Balance sheet is the book value which $66Million as an investment show.
This is the rules which is keep in recording.
b. investment revenue (loss) in Gupta's 2018 income statement
Investment revenu/loss is to be show in income statement.
In equity method
a proportional share of the Gupta's net income is recognized as an increase to revenues, while a loss and the payment of dividends would decrease the value of the investment and flow to the income statement.
c. investing activities in Gupta's 2018 statement of cash flows
In cash flow statement
- Cash outflow for investment $170m
+ Cash Inflow from investment dividend $15m
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