Spartan Inc. acquired 15% (90,000 shs) of the outstanding common stock of Buckeye Inc. on January 1, 20B for $2,160,000 (price was $84,000 over net book value - all related to Spartan’s share of undervalued equipment with a remaining life of 12 years; depreciation is st-line). Buckeye reported net income of $1,460,000 and declared and paid $902,000 of cash dividends during 20B. Fair value of the Buckeye shares was $26/share at year end. Required: (a) Prepare the journal entries for Spartan Inc. for 20B (include the acquisition entry), assuming that Spartan cannot exercise significant influence over Buckeye. The securities are correctly accounted for using the fair value method
Spartan Inc. acquired 15% (90,000 shs) of the outstanding common stock of Buckeye Inc. on January 1, 20B for $2,160,000 (price was $84,000 over net book value - all related to Spartan’s share of undervalued equipment with a remaining life of 12 years;
Required:
(a) Prepare the
(b) Assume now that Spartan acquires an additional 10% of Buckeye for $1,440,000 (total share is now 25%) and can exercise significant influence over Buckeye (equity method is required). The total purchase price of the 25% share ($3,600,000) was $140,000 over the book value of Buckeye’s identifiable net equity. The $140,000 related to Spartan’s share of undervalued assets with a useful life of 12 years (st-line depreciation is used). Prepare the necessary year-end journal entries for Spartan for 20B Buckeye’s net income was $1,460,000 for 20B; cash dividends of $902,000 were paid (solution table is on the next page). You are not required to provide the added acquisition entry or provide the transition entry.
4c) At what amount is the investment in securities reported on the Spartan balance sheet under each of the above methods on December 31, 20B? What is Spartan’s net investment income and/or dividend income to be reported in 20B under each of these methods (hint: prepare t-accounts; there is a transition entry effect)?
|
|
Trading Method |
Equity Method |
|
Investment account (balance sheet) |
|
|
|
Investment and/or dividend income (income statement) |
|
|
Trending now
This is a popular solution!
Step by step
Solved in 3 steps
