-5a 18. Austin, Inc., acquired 10 percent of McKenzie Corporation on January 1,
ID: 2398933 • Letter: #
Question
-5a 18. 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 S100,000 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 attribut- able 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 Iournal entries for Austin.Explanation / Answer
No.
To restate reported figures for 2014 to the equity method. (240000*10%)-3000=21000
21000-9000 =12000
Explanation :
The 2014 purchase must be restated to the equity method.
FIRST PURCHASE - JANUARY 1, 2014
Purchase price of McKenzie stock $210,000
Book value of McKenzie stock ($1,700,000 × 10%) (170,000)
Cost in excess of book value $40,000
Excess cost assigned to undervalued land ($100,000 × 10%) (10,000)
Trademark $30,000
Remaining life of trademark 10 years
Annual amortization $ 3,000
BOOK Value - McKenzie - JANUARY 1, 2015 (before second purchase)
January 1, 2014 book value (given) $1,700,000
2014 Net income 240,000
2014 Dividends (90,000)
January 1, 2015 book value $1,850,000
SECOND PURCHASE - JANUARY 1, 2015
Purchase price of McKenzie stock $600,000
Book value of McKenzie stock (above) ($1,850,000 × 30%) (555,000)
Cost in excess of book value $45,000
Excess cost assigned to undervalued land
($120,000 × 30%) (36,000)
Trademark $ 9,000
Remaining life of Trademark 9 years
Annual Amortization $ 1,000
No.
Account titles and explanation debit credit 1. Investment in McKenzie 600,000 Cash 600,000 To record second acquisition of McKenzie stock. 2. Investment in McKenzie 12,000 Retained EarningsPrior Period Adjustment - 2014 Equity Income 12,000To restate reported figures for 2014 to the equity method. (240000*10%)-3000=21000
21000-9000 =12000
3. Investment in McKenzie (300,000*40%) 120,000 Equity Income - Investment in McKenzie 120,000 To record income for the year. 4. Dividend Receivable (110,000*40%) 44,000 Investment in McKenzie 44,000 To record dividend declaration from McKenzie 5. Cash 44,000 Dividend Receivable 44,000 To record collection of dividend from investee 6. Equity Income - Investment in McKenzie (3000+1000) 4,000 Investment in McKenzie 4,000 To record 2015 amortization: $3,000 for first purchase, $1,000 for secondRelated Questions
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