Best Corporation acquired 100 percent of the voting common stock of Flair Compan

Question

Best Corporation acquired 100 percent of the voting common stock of Flair Company on January 1, 20X7, by issuing bonds with a par value and fair value of $670,000 and making a cash payment of $24,000. At the date of acquisition, Flair reported assets of $740,000 and liabilities of $140,000. The book values and fair values of Flair’s net assets were equal except for land and copyrights. Flair’s land had a fair value $16,000 higher than its book value. All of the remaining purchase price was attributable to the increased value of Flair’s copyrights with a remaining useful life of eight years. Flair Company reported a loss of $88,000 in 20X7 and net income of $120,000 in 20X8. Flair paid dividends of $24,000 each year.

Required:

Assuming that Best Corporation uses the equity method in accounting for its investment in Flair Company, prepare all journal entries for Best for 20X7 and 20X8. (If no entry is required for a transaction/event, select "No journal entry required" in the first account field.)

1a. Record the purchase of Flair Company stock for 20X7.

1b. Record the dividend from Flair Company for 20X7.

1c. Record the equity-method income/loss for 20X7.

1d. Record the amortization of the differential value for 20X7.

2a. Record the dividend from Flair Company for 20X8.

2b. Record the equity-method income/loss for 20X8.

2c. Record the amortization of the differential value for 20X8.

Explanation / Answer

1a. Record the purchase of Flair Company stock for 20X7. Investment in Flair Company stock $694,000.00 Cash $24,000.00 Bonds payable $670,000.00 1b. Record the dividend from Flair Company for 20X7. Cash $24,000.00 Investment in Flair Company stock $24,000.00 1c. Record the equity-method income/loss for 20X7. Income from Flair Company $88,000.00 Investment in Flair Company stock $88,000.00 1d. Record the amortization of the differential value for 20X7. Income from Flair Company $9,750.00 Investment in Flair Company stock $9,750.00 2a. Record the dividend from Flair Company for 20X8. Cash $24,000.00 Investment in Flair Company stock $24,000.00 2b. Record the equity-method income/loss for 20X8. Investment in Flair Company stock $120,000.00 Income from Flair Company $120,000.00 2c. Record the amortization of the differential value for 20X8 Income from Flair Company $9,750.00 Investment in Flair Company stock $9,750.00 Amortization of differential value: Book Value of Assets $740,000.00 Book Value of Liabilities -$140,000.00 Net book value $600,000.00 Land fair value increment $16,000.00 Fair value of net assets $616,000.00 Amount paid $694,000.00 Differential $78,000.00 Period of amortization (years) ÷ 8 Amortization per period $9,750.00

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