Question

On July 1, 2018, Gupta Corporation bought 30% of the outstanding common stock of VB Company...

On July 1, 2018, Gupta Corporation bought 30% of the outstanding common stock of VB Company for $170 million cash. At the date of acquisition of the stock, VB’s net assets had a total fair value of $490 million and a book value of $220 million. Of the $270 million difference, $50 million was attributable to the appreciated value of inventory that was sold during the last half of 2018, $160 million was attributable to buildings that had a remaining depreciable life of 10 years, and $60 million related to equipment that had a remaining depreciable life of 5 years. Between July 1, 2018, and December 31, 2018, VB earned net income of $60 million and declared and paid cash dividends of $50 million.

Required:
1. Prepare all appropriate journal entries related to the investment during 2018, assuming Gupta accounts for this investment by the equity method.
2. Determine the amounts to be reported by Gupta. (amounts in millions)

Journal Debit Credit
1 Investment in VB Shares 170m
Cash 170m
2 Investment in VB Shares ???
Investment Revenue ???
3. Cash 15m
Investment in VB Shares 15m
4 Investment Revenue ???
Investment in VB Shares ???
a Investment in Gupta's balance sheet   
b. investment revenue (loss) in Gupta's 2018 income statement
c. investing activities in Gupta's 2018 statement of cash flows

Homework Answers

Answer #1
Cost of purchase 170 M
Fair Value (490 M x 30%) 147 M
Book Value (220 M x 30%) 66 M
Excess 81 M
Attributable to:
Inventory (30% x 50 M) 15M
Building (30% x 160 M) 48 M
Equipment (30% x 60 M) 18 M
Goodwill (170 M less 147 M) 23 M
1 Journal Debit Credit
Purchase
1 Investment in VB Shares $ 170,000,000
Cash $ 170,000,000
Net Income
2 Investment in VB Shares (30% x $60 million) $   18,000,000
Investment Revenue $   18,000,000
Dividends
3 Cash (30% x 50 million) $   15,000,000
Investment in VB Shares $   15,000,000
Inventory, Building & Equipment
4 Investment Revenue* $   23,400,000
Investment in VB Shares $   23,400,000
* Inventory (30% x 50 million) 15 million
Building [(30% x 160 million) ÷ 10 years] 4.8 million
Equipment [(30% x 60 million) ÷ 5 years) 3.6 million
23.4 million
2 a. As an investment in the balance sheet:
Investment in VB Shares ($ in millions)
Cost 170
Share of income 18
15 Dividends
Cost of goods sold
15 adjustment for inventory
4.8 Depreciation adjustment for building
3.6 Depreciation adjustment for equipment
Balance 149.6
b. As investment revenue (loss)in the income statement:
$18 million - [$15 + 4.8 + 3.6] million = -$5.4 million
c. In the statement of cash flows (direct method):
• Investing activities: $170 million cash outflow
• Operating activities: $15 million cash inflow
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