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.

Prepare all appropriate journal entries related to the investment during 2018, assuming Gupta accounts for this investment by the equity method. (If no entry is required for a transaction/event, select "No journal entry required" in the first account field. Do not round intermediate calculations. Enter your answers in millions rounded to 2 decimal places (i.e., 5,500,000 should be entered as 5.50).)

1. Investment in VB Shares 170

Cash

 170
2. Investment in Vb Shares 18
Investment Revenue 18
3. Cash 15
Investment in VB Shares 15
4. Investment Revenue ???(see explanation below)
Investment in VB Shares ????????

Calculation of Box 4: (as says in Connect assignment)

Inventory (all sold in latter half of 2018, differential expensed): ???   
Buildings (year remaining life) ???
Equipment ???
Total: ???

Required 2:

a. Investment in Gupta's 12/31/18 balance sheet ???
b. Investment revenue(loss) in Gupta's 2018 income statement ???
c. investing activities in Gupta's statement of cash flows 170

Part A. Investment in VB Shares:

Cost 170

Share of income ??

Dividends ??

Amortization of purchase price (JE number 4) ??

Balance: ???

Part B: (total share of income)- (adjustment for amortization purchase price differential)=investment loss

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Homework Answers

Answer #1

Part:A

A: Price paid for investment by gupta corp.(25% share) = $100 million

B: Gupta's corp share of book value of net asset = $55 million ($220*25%)

C:Excess of purchase price = $45 million

D: Exess allocated to Inventory (20 million*25%) = $5 million

E: Exess allocated to Building (80 million*25%) = $20 million

F: Exess allocated to Equipment (30 million*25%) = $7.5 million

G: Goodwill = $12.5 million

Part B:

Amortization Schedule:

Items Differential Remaining useful life   Amortization

Inventory $5 million Sold in same year $5 million

Building $20 million 10 years $2 million

Equipment $7.5 million 5 years $1.5 million

Goodwill $12.5 million Not relevant Nil

Total $8.5 million

Jornal Entry

By equity income from VB company Dr $8.5 million (Amortization of differential)

To Investment in VB comapny Cr $8.5 million

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