Question

In: Accounting

On March 1, 202x, the XYZ Company acquired 40% of the voting stock of KLM Company...

On March 1, 202x, the XYZ Company acquired 40% of the voting stock of KLM Company for $6 million. The net worth of KLM book value is $10 million. The fair market value of the KLM assets and liabilities are equal except for a building with book value of $ 3 million has a fair value of $5 million

KLM reported net income of $2 million and made dividends distribution of 1 million during the year ending 12/31/202x. Assume xyz is using the equity method for the investment.

A. was there any good will in this transaction? How much?

B. Make the jounral entry to reflect the above transactions by xyz company during 2020

Assume XYZ uses straight line depreciation and 10 years economic life

Show the general ledger of "investment" account and ending balance by XYZ company on 12/31/20x

Solutions

Expert Solution

Definition:

As per the equity method of investment it is a technique which is used by a company to record the profit earned through its investment in an another company. So, under the equity method of accounting, the investor company reports the revenue earned by the other company on its income statement , the manner in which it is done is an amount proportional to the percentage of its equity invested in the other company.

Answer to Question 1)

Yes, there is goodwill in this transaction. The value of goodwill is percentage of voting rights acquired by XYZ Company of KLM Company, on the net income reported at the end. That is $800,000 ($2,000,000 x 40%)

Answer to Question 2)

Answer to Question 3)

ekkarill92 answered 1 year ago
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