8. Victory Motors, Inc. purchases 22% of the common stock of Apps Motorcycles on

Question

8. Victory Motors, Inc. purchases 22% of the common stock of Apps Motorcycles on January 1, 2015 for $12,000,000 with a price per share of $60. On January 1, 2016, Apps issues additional common shares which brings Victory Motor’s ownership percentage to 16%. Below are highlights for Apps Motorcycles for 2015 and 2016. Victory Motors classifies equity investments as available for sale when using the fair value method.

a. Prepare the journal entries for Victory Motors Inc. for 2015, including the acquisition.

b. Prepare the journal entries for 2016.

2015 2016 Net income $4,000,000 $5,000,000 Dividends paid (total) 2,000,000 2,500,000 Fair value per share $65 $55

Explanation / Answer

Journal Entries:

a & b)

Date Accounts Titles and explanation Debit $ Credit $ 2015 Jan 1 Equity Investment in Apps 12000000 Cash 12000000 (acquisition of 200000 common stocks of subsidiary Apps) Dec 31 Equity Investment in Apps 880000 Net Income of Apps 880000 Cash 440000 Equity Investment in Apps 440000 (being dividend received from subsidiary Apps) Equity Investment in Apps (fair value) 13000000 Equity Investment in Apps 12000000 Unrealised Income on Investment in Apps 1000000 (recording Investment in Apps at fair value $ 65 and booking unrealised income) Dec 31, 2016 Equity Investment in Apps 800000 Net Income of Apps 800000 (booking net income @ 16% share in Apps equity) Cash 400000 Equity Investment in Apps 400000 Equity Investment in Apps (fair value) 11000000 Unrealised Income on Investment in Apps 2000000 Equity Investment in Apps (fair value) 13000000 (recording Investment in Apps at fair value @ $55 and booking loss)

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