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Chapter 12: 7BE (page 610)

Zoop Corporation purchased for \(300,000 a 30% interest in Murphy, Inc. This investment enables Zoop to exert significant influence over Murphy. During the year, Murphy earned net income of \)180,000 and paid dividends of $60,000. Prepare Zoop’s journal entries related to this investment.

Short Answer

Expert verified

a) The amount debited to investment is $300,000.

b) The amount of dividend received is $18,000.

c) The unrealized gain on the investment is $54,000.

Step by step solution

01

Step-by-Step Solution Step 1: Definition of Investment

Investment means the excess amount used for saving in future

02

 Journal entry of the purchase of the investment

Date

Description

Debit

Credit

A.

Investment

$300,000

Cash

$300,000

Being entry to record the purchase of common stock

03

Journal entry for the dividend  received

Date

Description

Debit

Credit

B

Cash

$18,000

Dividends

$18,000

Being entry of dividend received

04

Adjustment entry for a share in net income

Date

Description

Debit

Credit

C

Investment

$54,000

Share of equity method in earnings

$54,000

Being fair value adjustment common stock

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Most popular questions from this chapter

Question: Briefly describe some of the similarities and differences between GAAP and IFRS with respect to the accounting for intangible assets.

Question: (Recording and Amortization of Intangibles) Marshall Company, organized in 2016, has set up a single account for all intangible assets. The following summary discloses the debit entries that have been recorded during 2017.

1/2/17

Purchased patent (8-year life)

\( 350,000

4/1/17

Purchase goodwill (indefinite life)

360,000

7/1/17

Purchased franchise with 10-year life; expiration date 7/1/27

450,000

8/1/17

Payment of copyright (5-year life)

156,000

9/1/17

Research and development costs

215,000

\)1,531,000

Instructions

Prepare the necessary entries to clear the Intangible Assets account and to set up separate accounts for distinct types of intangibles. Make the entries as of December 31, 2017, recording any necessary amortization and reflecting all balances accurately as of that date. (Use straight-line amortization.)

Question: Michek Company loans Sarasota Company \(2,000,000 at 6% for 3 years on January 1, 2017. Michek intends to hold this loan to maturity. The fair value of the loan at the end of each reporting period is as follows.

December 31, 2017 \)2,050,000

December 31, 2018 2,020,000

December 31, 2019 2,000,000

Prepare the journal entry(ies) at December 31, 2017, and December 31, 2019, for Michek related to these bonds, assuming (a) itdoes not use the fair value option, and (b) it uses the fair value option. Interest is paid on January 1.

Question: (Goodwill, Impairment) On July 31, 2017, Mexico Company paid \(3,000,000 to acquire all of the common stock of Conchita Incorporated, which became a division of Mexico. Conchita reported the following balance sheet at the time of the acquisition.

Current assets

\) 800,000

Current liabilities

\( 600,000

Noncurrent assets

2,700,000

Long-term liabilities

500,000

Total assets

\)3,500,000

Stockholders’ equity

2,400,000

Total liabilities and stockholders’ equity

\(3,500,000

It was determined at the date of the purchase that the fair value of the identifiable net assets of Conchita was \)2,750,000. Over the next 6 months of operations, the newly purchased division experienced operating losses. In addition, it now appears that it will generate substantial losses for the foreseeable future. At December 31, 2017, Conchita reports the following balance sheet information.

Current assets

\( 450,000

Noncurrent assets (including goodwill recognized in purchase)

2,400,000

Current liabilities

(700,000)

Long-term liabilities

(500,000)

Net assets

\)1,650,000

It is determined that the fair value of the Conchita Division is \(1,850,000. The recorded amount for Conchita’s net assets (excluding goodwill) is the same as fair value, except for property, plant, and equipment, which has a fair value \)150,000 above the carrying value.

Instructions

  1. Compute the amount of goodwill recognized, if any, on July 31, 2017.
  2. Determine the impairment loss, if any, to be recorded on December 31, 2017.
  3. Assume that fair value of the Conchita Division is \(1,600,000 instead of \)1,850,000. Determine the impairment loss, if any, to be recorded on December 31, 2017.

Prepare the journal entry to record the impairment loss, if any, and indicate where the loss would be reported in the income statement.

Joni Hyde Inc. has the following amounts reported in its general ledger at the end of the current year.

Organization costs $24,000

Trademarks 15,000

Discount on bonds payable 35,000

Deposits with advertising agency for ads to promote goodwill of company 10,000

Excess of cost over fair value of net identifiable assets of acquired subsidiary 75,000

Cost of equipment acquired for research and development projects; the equipment has an alternative future use 90,000

Costs of developing a secret formula for a product that is expected to be marketed for at least 20 years 80,000

Instructions

(a) On the basis of the information above, compute the total amount to be reported by Hyde for intangible assets on its balance sheet at year-end.

(b) If an item is not to be included in intangible assets, explain its proper treatment for reporting purposes.
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