Austin, Inc., acquired 10 percent of McKenzie Corporation on January 1, 2014, fo
ID: 2519152 • Letter: A
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
Debit Credit 2015/Q1 Land 110,000 Cash 110,000 (land was under-valued) 2015/Q2 Investment 600,000 Cash 600,000 (Additional Investment of 30%) 2015/Q3 Cash 300,000 Income 300,000 (Income received from funds) 2015/Q4 Cash 110,000 Investment 110,000 (Dividend pay out)
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