Question

Austin, Inc., acquired 10 percent of McKenzie Corporation on January 1, 2014, for $210,000 although McKenzie’s book value on that date was $1,700,000. McKenzie held land that was undervalued by $100,000 on its accounting records. During 2014, McKenzie earned a net income of $240,000 while declaring and paying cash dividends of $90,000. On January 1, 2015, Austin purchased an additional 30 percent of McKenzie for $600,000. McKenzie’s land is still undervalued on that date, but then by $120,000. Any additional excess cost was attributable to a trademark with a 10-year remaining life for the first purchase and a 9-year life for the second. The initial 10 percent investment had been maintained at cost because fair values were not readily available. The equity method will now be applied. During 2015, McKenzie reported income of $300,000 and declared and paid dividends of $110,000. Prepare all of the 2015 journal entries for Austin

Answer 1

Purchase must be restated to the Equity Method :-

Purchase - Jan. 1, 2014	Amount($)
Purchase Price of McK. Corporation Stock	$210000
Less : Book Value of Mck. Corporation Stock($1700000*10%)	(170000)
Cost in Excess of Book Value	40000
Less : Excess cost Assigned to undervalued Land ($100000*10%)	(10000)
Trademark	30000
Life of Trademark	10 Years
Annual Amortization ($30000 / 10)	3000

Calculatio of Book Value- Mck. Corporation

Particulars	Amount($)
Jan. 1, 2014 Book Value	1700000
Add : Net Income of 2014	240000
Less : Dividends of 2014	(90000)
Jan. 1, 2015 Book Value	1850000

Second Purchase - Jan. 1, 2015 :-

Particulars	Amount($)
Purchase Price of Mck. corporation	600000
Less : Book Value of Mck. Corporation stock ($1850000*30%)	(555000)
Cost in Excess of Book Value	45000
Less : Excess cost assigned to undervalued land ($120000*30%)	(36000)
Trademark	9000
Life of Trademark	9 years
Annual Amortization	$1000

Journal Entries ;-

S No.	Particulars	Debit($)	Credit($)
1	Investment in Mck Corporation A/c Dr.	600000
	To Cash A/c		600000
	(To Record Second Acquisition of Mck. Corpo. Stock)
2	Investment in Mck. Corporation A/c Dr.	12000
	To Retain Earnings- Prior Period Adju. 2014 Eq. Income		12000
3	Investment in Mck. Corporation A/c Dr.	120000
	To Equity Income - Investment in Mck. Corporation A/c		120000
	($300000*40%)
4	Cash A/c Dr.	44000
	To Investment in Mck. Corporation A/c		44000
	(Collection of Dividends from Mck. Corpo. 40%)
5	Equity Income - Investment in Mck. Corporation A/c Dr.	4000
	To Investment in Mck. Corporation A/c		4000
	(To Record amortization for 2016 ($3000 + $1000))