On August 1, 2020, Swifty Corporation purchased 20% of the outstanding voting shares in WLT Corporation for $1,290,000. At the time of purchase, WLT’s net assets were undervalued by $74,700 and had a remaining useful life of 12 years. Both companies had a December 31 year-end. At the end of 2020, WLT reported a net income of $350,000. Also, on December 31, 2020, the fair value of the investment in WLT shares was $1,413,000. On January 10, 2021, WLT paid a cash dividend. Swifty’s ownership entitles it to $21,800 of the dividend.
On August 1, 2020, Swifty Corporation purchased 20% of the outstanding voting shares in WLT Corporation for $1,290,000. At the time of purchase, WLT’s net assets were undervalued by $74,700 and had a remaining useful life of 12 years. Both companies had a December 31 year-end. At the end of 2020, WLT reported a net income of $350,000. Also, on December 31, 2020, the fair value of the investment in WLT shares was $1,413,000. On January 10, 2021, WLT paid a cash dividend. Swifty’s ownership entitles it to $21,800 of the dividend.
Chapter1: Financial Statements And Business Decisions
Section: Chapter Questions
Problem 1Q
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Question
On August 1, 2020, Swifty Corporation purchased 20% of the outstanding voting shares in WLT Corporation for $1,290,000. At the time of purchase, WLT’s net assets were undervalued by $74,700 and had a remaining useful life of 12 years. Both companies had a December 31 year-end. At the end of 2020, WLT reported a net income of $350,000. Also, on December 31, 2020, the fair value of the investment in WLT shares was $1,413,000. On January 10, 2021, WLT paid a cash dividend. Swifty’s ownership entitles it to $21,800 of the dividend.
Prepare thejournal entries on the books of Swifty Corporation to record the transactions described above, assuming that the 20% interest in WLT does not represent significant influence, and that Swifty elected to account for its investment following the fair value through net income (FV-NI) model. (Credit account titles are automatically indented when the amount is entered. Do not indent manually. Record journal entries in the order presented in the problem. If no entry is required, select "No Entry" for the account titles and enter 0 for the amounts.)
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