Austin, Inc., acquired 10 percent of McKenzie Corporation on January 1, 2014, fo

Question

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 $100,000 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 attributable 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 journal entries for Austin

Explanation / Answer

Purchase must be restated to the Equity Method :-

Calculatio of Book Value- Mck. Corporation

Second Purchase - Jan. 1, 2015 :-

Journal Entries ;-

Purchase - Jan. 1, 2014 Amount($) Purchase Price of McK. Corporation Stock $210000 Less : Book Value of Mck. Corporation Stock($1700000*10%) (170000) Cost in Excess of Book Value 40000 Less : Excess cost Assigned to undervalued Land ($100000*10%) (10000) Trademark 30000 Life of Trademark 10 Years Annual Amortization ($30000 / 10) 3000

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