On January 2, 2017, SPU Corporation acquired 30% of the outstanding voting commo

Question

On January 2, 2017, SPU Corporation acquired 30% of the outstanding voting common stock of Brough Company for $335,000. This investment enabled SPU to exercise significant influence over Brough.

    The book value of the acquired shares was $315,000 (the book value of Brough Co was $1,050,000). The excess of cost over book value was attributed to a building that was undervalued on Brough’s balance sheet and that had a remaining useful life of 10 years.  

    For the year ended December 31, 2017, Brough reported income of $70,000 and paid cash dividends of $15,000 on its common stock.

A) Make all journal entries necessary on SPU’s books to record its investment in Brough Company for the first year.

B) What is the ending balance of SPU’s investment in Brough at December 31, 2017?

Explanation / Answer

Solution A:

Solution B:

Ending balance of SPU's investment in Brough = $335,000 + $21,000 - $4,500 = $351,500

Journal Entries - SPU Corporation (Equity Method) Date Particulars Debit Credit 2-Jan-17 Investment in Brough Company Dr $335,000.00             To Cash $335,000.00 (Being investment made in Brough Company) 31-Dec-17 Investment in Brough Company Dr $21,000.00             To Investment Income ($70,000*30%) $21,000.00 (Being share of income recoganised for investment in Associate enterprise - Brough Company) 31-Dec-17 Cash Dr ($15,000*30%) $4,500.00             To Investment in Brough Company $4,500.00 (Being dividend received from Associate enterprise - Brough Company)

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