Question

On January 1, 2018, Milk purchased 40 percent of Cow for $974,000 in cash, which resulted in significant influence over Cow. On that date, the fair value of Cow's common stock was $2,435,000 in total. Cow's January 1, 2018 book value equaled $1,830,000, although land was undervalued by $130,000. Any additional excess fair value over Cow's book value was attributable to a trademark with an 8-year remaining life. During 2018, Cow reported income of $280,000 and declared and paid dividends of $102,000. Prepare the 2018 journal entries for Milk related to its investment in Cow.

1. What journal entry does Milk record for the initial investment in Cow?

General Journal	Debit	Credit

2. What is Milk’s journal entry, if any, to record the equity income of Cow?

General Journal	Debit	Credit

3. What is Milk’s journal entry, if any, to record dividends received from Cow?

General Journal	Debit	Credit

4. What is Milk’s journal entry, if any, to record excess amortization expense?

General Journal	Debit	Credit

Problem 1 – Part B (5 Points): RA, Inc., sold $153,000 in inventory to AML Company during 2017 for $225,000. AML resold $102,000 of this merchandise in 2017 with the remainder to be disposed of during 2018. Assuming that RA owns 35 percent of AML and applies the equity method, what journal entry is recorded at the end of 2017 to defer the intra-entity gross profit?

General Journal	Debit	Credit

Answer 1

Journal Entries.

For the Initial Investment in Cow.
		(Amount in $)
Particular	Amount (DR)	Amount (CR)
Investment A/c	974000
To,Cash		974000
(Investment in Cow)
For recording Equity Income of Cow
Profit & Loss A/C	280000
To Reserve & Surplus		280000
(Transfer of Profit To Reserve)
For Receiving Dividends
Cash A/c	40800
Dividend Income		40800
(dividend income received)
Calculation of Gross Profit in 2017
Selling Price		225000
Purchase Price		153000
Gross Profit		72000
Purchase Price		153000
35 % Hold by RA		25200
Actual Purchase Price		127800