Mahogany Company purchased a 40% interest in the voting stock of Bough Company o

Question

Mahogany Company purchased a 40% interest in the voting stock of Bough Company on January 1,20X1 for $4 million. At the time of purchase, the book value of the net assets of Bough Company was $6 million, with an average life expectancy of ten years. The fair market value of these assets at the time of purchase was estimated to be S9 million. Mahogany Company's fiscal year ends on December 3 For the year 20X1, Bough Company reported a loss of $500,000. The company paid no dividends during 20X1 . REQUIRED: () Prepare the journal entries, in proper general journal form, for 20X1 to Mahogany Company's investment in Bough Company. properly record Calculate the amount that would be reported on Mahogany Company's balance sheet at December 31, 20X1 for its investment in Bough Company. (2)

Explanation / Answer

Answer to part 1

= 1.6/10

= $ 0.16 million

Answer to part 2

Amount to be reported in Mahogany's company balance sheet at the end of 31st December in investment in Bough co. is

= Investment in Bough co. - Loss of revenue- Amortization cost of excess payment

= 4 - 2 - 0.16 = $1.84 million

( $ in millions ) S. No Journal Debit Credit 1 Investment in Bough Co. Shares 4          Cash 4 (Acquisition of 40% shares) 2 Revenue 2               Investment in Bough Co. ($500000x 40%) 2 (To accrue 40% of the reported loss of the investee) 3 Equity in Bough Co. Income 0.16               Investment in Bough Co. 0.16 (To record amotization of excess payment )

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