On January 1, 2018, Cameron Inc. bought 20% of the outstanding common stock of L

Question

On January 1, 2018, Cameron Inc. bought 20% of the outstanding common stock of Lake Construction Company for $340 million cash. At the date of acquisition of the stock, Lake's net assets had a fair value of $900 million. Their book value was $850 million. The difference was attributable to the fair value of Lake's buildings and its land exceeding book value, each accounting for one-half of the difference. Lake’s net income for the year ended December 31, 2018, was $270 million. During 2018, Lake declared and paid cash dividends of $30 million. The buildings have a remaining life of 5 years.

Required:
1. Complete the table below and prepare all appropriate journal entries related to the investment during 2018, assuming Cameron accounts for this investment by the equity method.
2. Determine the amounts to be reported by Cameron.

Millions Investee Net Assets Ownership Interest Net Assets Purchased Difference Attributable to Cost Fair Value 900 20 % 180 Book Value 850 20% 170 Years Adjustment Invest Rev 5 / 5years 1

Explanation / Answer

1. Table below:

Journal entries: (amounts in millions)

a. Investment in Lake Construction         340

Cash                                                                 340

b. Investment in Lake Construction         54

Investement Revenue                                       54

(270*20%)

c. Cash                                                     6

Investment in Lake Construction                        6

(30*20%)

d. Investment Revenue                            1

Investment in Lake Construction                        1

(5 / 5 years = 1)

2a. Investment in Cameron's 2018 balance sheet (in millions)

Total Cost =                                   $340

Income share =                            $54

Less: Dividends =                         $6

Less: Depreciation adjustment = $1

Balance =                                       $387 million

2b. Investment revenue in the income statement

Income share =                            $54

Less: Depreciation adjustment = $1

Balance =                                      $53 million

2c. Investing activities in the statement of cash flows

$340 million

Also, the cash dividend received for $6 million will also be reported as part of operating activities.

Millions Investee Net Assets Ownership Interest Net Assets Puchased Difference Attributable to Cost 340 Fair Value 900 20% 180 160 Goodwill Book Value 850 20% 170 10 Under valuation of Assets Years Adjustment Invest Rev 5 5 1

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