(4 points) Krisp acquired 40% of the voting common shares of Baker on 01-01-18 a

Question

(4 points) Krisp acquired 40% of the voting common shares of Baker on 01-01-18 at a total cost of $2,785,000. At the time of the acquisition, the fair value of Baker’s net assets was $6,962,500 while the book value of Baker’s net assets was $6,337,500. The difference between Baker’s fair value and book value of its net assets was due to the fair value of equipment that is higher than book value. The equipment has a 10-year remaining useful life. Both Krisp and Baker depreciate fixed assets using a straight-line method and both assume no salvage value. For the year ending 12-31-18, Baker reported $300,000 of net income and declared and paid $60,000 of cash dividends.

Prepare all of the entries that Krisp should make in 2018 relating to its investment in Baker.

As of 12-31-18, what is the amount Krips has in its investment account relating to its investment in Baker?

Explanation / Answer

Acquisition Price $2,785,000 Add: Net Income (300000*40%) 120000 Less: Dividend (60000*40%) -24000 Less: Depreciation -62500 Investment account as on 12/31/18 $2,818,500 working (Fair value-book value) net assets 625000 (6962500-6337500) Allocated to equipment 625000 No. of years 10 Depreciation per year 62500 Accounts Title Dr Cr 1 Investment in Baker $2,785,000 Cash $2,785,000 (being equity investment recorded) 2 Investment in Baker 120000 Equity Income-Baker 120000 3 Cash 24000 Investment in Baker 24000 4 Depreciation expense 62500 Investment in Baker 62500 Investment account as on 12/31/18 2818500

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