Equity Method: Cost Greater than Book Value On January 1 of Year 1, Dridge Compa

Question

Equity Method: Cost Greater than Book Value On January 1 of Year 1, Dridge Company purchased 2,500 shares of the 10,000 outstanding shares of Company C for a total of $100,000. At the time of the purchase, the book value of Company C's equity was $300,000. Company C assets having a fair value greater than book value at the time of the acquisition were as follows:

1. Make all journal entries necessary on Dridge's books to record its investment in Company C in Year 1 as follows: (1) acquire investment, (2) record Dridge's share of income, (3) record dividends received, and (4) the amortization of the excess purchase price over book value. Assume that the goodwill is not impaired.

2. Compute the Year 1 ending balance in Dridge Company's investment in Company C account.

Explanation / Answer

1. Journal Entries In The Books Of Dridges books.

1. Acquire investment

Equity's of C company a/c $100000

To Cash a/c $100000

2. Share of income.

Cash a/c $300000

To Equity Of C company a/c $100000

To Security Premium a/c $200000

3. Amortization

Cash a/c $60000

To Inventory a/c $10000

To Building a/c $50000

4. Dividend received on Investment is $40000

2 . Computing the year ending balance

Inventory $50000

Building $250000

Goodwill $40000

Total Assets $340000   

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