Question

In: Accounting

During January 2020, Apple Inc., a private enterprise that uses ASPE, purchased 40% of the common...

During January 2020, Apple Inc., a private enterprise that uses ASPE, purchased 40% of the common shares of Banana Corp. for $484,000. Apple was now able to exercise considerable influence in decisions made by Banana’s management. Banana Corp.’s statement of financial position reported the following information at the date of acquisition:

Assets not subject to being amortized

$242,000

Assets subject to amortization (10 years average life remaining)

732,000

Liabilities

136,000

Additional information:

· Both the carrying amount and fair value are the same for assets that are not subject to amortization and for the liabilities.

· The fair value of the assets subject to amortization is $885,000.

· The company amortizes its capital assets on a straight-line basis.

· Banana reported net income of $192,000 and declared and paid dividends of $132,000 in 2020.

Required

1. Prepare the journal entry to record Apple’s investment in Banana Corp. Assume that any unexplained payment is goodwill.

2. Assuming Apple applies the equity method to account for its investment in Banana, prepare the journal entries to record Apple’ equity in the net income and the receipt of dividends from Banana Corp. in 2020.

3. Assume the same factors as above and in part (2), except that Banana’s net income included a loss on discontinued operations of $45,000 (net of tax). Prepare the journal entries necessary to record Apple’s equity in the net income of Banana for 2020.

Expert Solution

Answer:
Book value of Investee company = $ 242000+732000-136000 =	$ 8,38,000.00
Share of Investor in Investee Company = $ 838000 * 40% = $ 335200
Value paid for Share in Investee company = $ 4,84,000
Good will = $ 4,84,000 - $ 3,35,200 = $ 1,48,800
The Investor share of Good will be record of Investment. It is a Part of Investment Cost.

1. Journal for Purchase of Investment
Date	Account Tittle	Debit	Credit
Jan-20	Investment in Banana's Corp A/c	484000
	Cash A/c		484000
	(Entry made for Purchase of Investment)

b) Journal Entries using Equity Method
Date	Account Tittle	Debit	Credit

2020	Investment in Banana's Corp A/c	$ 76,800
	Income From Investment A/c		$ 76,800
	(Entry Made recognization Investee Net Income)

2020	Cash A/c	$ 52,800
	Investment In Pirates Company A/c		$ 52,800
	(Entry Made Divedend Received From Pirates Company)

c) Journal Entries using Equity Method

Date	Account Tittle	Debit	Credit

2020	Investment in Banana's Corp A/c	$ 58,800
	Income From Investment A/c		$ 58,800
	(Entry Made recognization Investee Net Income)

2020	Cash A/c	$ 52,800
	Investment In Pirates Company A/c		$ 52,800
	(Entry Made Divedend Received From Pirates Company)

Working Note for c
Net Income from Operation = $ 1,92,000
Less: Loss from Discontinued Operations = $ 45000
Net Income From Investee Company =$ 1,47,000

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