Equity method investments On January 4, 2010, Newcrest Gold Co. Ltd. paid $66 mi
ID: 2571708 • Letter: E
Question
Equity method investments
On January 4, 2010, Newcrest Gold Co. Ltd. paid $66 million for 3 million shares of Austin Mining Company common stock. The investment represents a 30% interest in the net assets of Austin and gave Newcrest the ability to exercise significant influence over Austin’s operations. Newcrest uses the equity method to record the investment.
Newcrest received dividends of $1.60 per share on December 6, 2010, and Austin reported net income of $32 million for the year ended December 31, 2010. The market value of Austin’s common stock at December 31, 2010, was $23 per share. The book value of Austin’s net assets was $160 million and:
a) The fair market value of Austin’s depreciable assets, with an average remaining useful life of 8 years, exceeded their book value by $16 million.
b) The remainder of the excess of the cost of the investment over the book value of net assets purchased was attributable to goodwill.
Required:
1) Prepare all appropriate journal entries related to the investment during 2010.
2) What is the carrying amount of this investment on Newcrest's balance sheet as of December 31, 2010?
3) What's the effect of this investment on Newcrest's 2010 income before taxes?
Explanation / Answer
1.
2.
3.
Date General journal Debit Credit Jan.4 Investment in Austin mining 66000000 To cash 66000000 [ 3 million common shares of Austin mining purchased] Dec.31 Investment in Austin mining 9600000 Equity in Earnings of Austin mining 9600000 [Share of earning of austin mining= 32M*30%] Dec.31 Cash 4800000 Investment in Austin mining 4800000 [Dividends received= 1.6*3M] Dec.31 Equity in Earnings of Austin mining 600000 Investment in Austin mining 600000 [ Share of Excess fair value amortisation of Austin mining plant = 16000000/8 *30%]Related Questions
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