On July 1, 2015 Allen Company acquired 70,000 of the outstanding shares of Brown

Question

On July 1, 2015 Allen Company acquired 70,000 of the outstanding shares of Brown Company for $12 per share. This acquisition gave Allen a 40 percent ownership of Brown and allowed Allen to significantly influence the investee’s decision-making process.

As of July 1, 2015, the investee had assets with a book value of $2 million and liabilities of $600,000. At the time, Brown held equipment appraised at $150,000 above book value; it had a six-year remaining life with no salvage value. Brown also held a copyright with a five-year remaining life on its books that was undervalued $400,000. Any remaining excess cost was attributable to goodwill. Depreciation and amortization are computed using the straight-line method. Allen applies the equity method for its investment in Brown.

Brown’s policy is to pay a $1 per share cash dividend every April 1 and October 1. Brown’s income, earned evenly throughout the year, was $500,000 in 2015, $525,000 in 2015, and $600,000 in 2017. In addition, Allen sold inventory costing $90,000 to Brown for $150,000 during 2015. Brown resold $80,000 of this inventory during 2015 and the remaining $70,000 during 2017.

Required:
A. Prepare the journal entries for Allen for the years 2015 through 2017.

B. Compute the income recognized by Allen in 2016.

C. Compute Allen’s Investment in Brown Company account balance in 2017.

Additional Information for letters D, E & F Only: Assume that Allen Company does not have significant influence over Brown Company, the fair value of the investment at the end of 2015 was $900,000, and the investment is considered an available for sale security.

D. Under these revised circumstances, prepare the journal entries for Allen for 2015. (Hint: You may want to refer to the Intermediate Accounting textbook to assist you with this.)

E. Compute the income recognized by Allen in 2015 under the revised circumstances.

F. Compute Allen’s Investment in Brown account balance in 2015 under the revised circumstances.

Explanation / Answer

D.on july 2015

E. Income of ivest will be difference of fairvalue and purchase price which is

=900000-840000

=60000

f. Investment will be Recognise on fair value of investmemt which is 900000

Debit Credit A.Journal ENTRIES FOR Allen 1. On Purchase of of investment on 1 july 2015 Investment in Brown 840000 To cash 840000 2. on reciepts of dividend on 1 oct 2015 Cash a/c dr 70000 To Investment in Brown 70000 3. On income of brown On dec 2015 Investment in Brown 67800 To INVESTMENT INCOME 67800 Calculation of Income of 2015 6 month Income 250000 Less Adjustment Depreciation on Copy RIGHT 40000 Depreciation on Equiments 12500 Profit on inventory 28000 169500 Share of Allen 67800 4. on 1 april 2016 2. on reciepts of dividend Cash a/c dr 70000 To Investment in Brown 70000 On oct 2016 . on reciepts of dividend Cash a/c dr 70000 To Investment in Brown 70000 5. on 31 dec 2016 On income of brown On dec 2015 Investment in Brown 179200 To INVESTMENT INCOME 179200 Calculation of income recognizes by allen in 2016 Income 525000 Profit on inventory 28000 Less Adjustment Depreciation on Copy RIGHT 80000 Depreciation on Equiments 25000 Total Income 448000 Share of Allen 179200 6. on 1 april 2017 on reciepts of dividend Cash a/c dr 70000 To Investment in Brown 70000 On oct 2016 on reciepts of dividend Cash a/c dr 70000 To Investment in Brown 70000 7. On Income of 2017 on dec 2017 Investment in Brown 198000 To INVESTMENT INCOME 198000 Calculation of income recognizes by allen in 2017 Income 600000 Less Adjustment Depreciation on Copy RIGHT 80000 Depreciation on Equiments 25000 Total Income 495000 Share of Allen 198000 B. Calculation of income recognizes by allen in 2016 Income 525000 Profit on inventory 28000 Less Adjustment Depreciation on Copy RIGHT 80000 Depreciation on Equiments 25000 Total Income 448000 Share of Allen 179200 C. Computation of Investment account balance as on dec 2017 Purchase price                        8,40,000.00 Add:- income 2015                          67,800.00 income 2016                        1,79,200.00 income 2017                        1,98,000.00 Less:- Dividend received in 2015                          70,000.00 Dividend received in 2016                        1,40,000.00 Dividend received in 2017                        1,40,000.00 Balance as on 31 dec 2017                        9,35,000.00

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