Question

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

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