On January 1, 2020, Jordan Inc. purchased 25% of the outstanding common stock of Melody Corporation at a cost of $450,000. Melody Corporation had 400,000 shares of common stock outstanding. At the date of purchase, the book value of Melody’s net assets was $1,500,000. Book value and fair value of net assets were the same for all balance sheet items except for machinery and inventory. The fair value exceeded the book value by $100,000 for machinery and $20,000 for the Inventory.
The estimated useful life of machinery is 10 years and all inventory acquired was sold during 2020. Both companies have a January through December fiscal year. Melody Corporation reported net income of $200,000 and paid cash dividend of $50,000 during 2020. Market value of Melody Corporation was $6 per share at December 31, 2020.
(1.) Prepare the entry to record the original investment in Mountain.
(2.) Compute the amount of goodwill (if any) on the acquisition.
(3.) Prepare the necessary entries (other than acquisition) for 2020.
(4.) Assume that on January 10, 2020 Jordan Inc. sold 40% of its investment in Melody Corporation for $220,000. Prepare the journal entry to record the sale of investment.
(5). Assume that subsequent to selling 40% of the investment, Melody Corporation reported income of $250,000 and paid dividend of $40,000 for 2021. Market value of Melody Corporation’s common stock was $5 per share at December 31, 2021. Prepare the journal entries (if any) for Jordan Inc. for its investment in Melody Corporation for 2021.
Investment in Melody Corporation A/c Dr. $4,50,000
To cash A/c $4,50,000
(Being 25 % of common stock Purchased)
Calculation of goodwill :
Book value of Net Assets = $15,00,000
Fair value of Net Assets = 15,00,000 + 1,00,000 + 20,000 = $16,20,000
Excess of purchase price over fair value of net assets = 450,000 - (16,20,000*25%) = $45,000
Therefore, Goodwill = $45,000
Machinery A/c Dr. $1,00,000
Inventory A/c Dr. $20,000
To Revaluation surplus A/c 1,20,000
(Being Machinery and inventory Revalued upwards)
Dividend A/c Dr. $50,000
To cash A/c $50,000
Cash A/c Dr. $2,20,000
To Gain on Investment A/c $40,000
To Investment in melody Corporation A/c $1,80,000
(Being 40% of Investment sold by Jordan Inc.)
Investment in Melody Corporation a/c Dr. $8,00,000
To Cash A/c $8,00,000
(Being 40 % in Melody corporation purchased)
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