On January 1, 2014, Allan acquires 15 percent of Bellevue\'s outstanding common

Question

On January 1, 2014, Allan acquires 15 percent of Bellevue's outstanding common stock for $73,400. Allan classifies the investment as an available-for-sale security and records any unrealized holding gains or losses directly in owners' equity. On January 1, 2015, Allan buys an additional 10 percent of Bellevue for $56,820, providing Allan the ability to significantly influence Bellevue's decisions During the next two years, the following information is available for Bellevue: Dividends $40,000 57,000 Common Stock Fair Value (12/31) $522,500 573,500 Income 2014 2015 $140,000 174,000 In each purchase, Allan attributes any excess of cost over book value to Bellevue's franchise agreements that had a remaining life of 10 years at January 1, 2014. Also at January 1, 2014, Bellevue reports a net book value of $326,000 a. Assume Allan applies the equity method to its Investment in Bellevue account: 1. On Allan's December 31, 2015, balance sheet, what amount is reported for the Investment in Bellevue account? Investment in Bellevue 2. What amount of equity income should Allan report for 2015? Equity income 3. Prepare the January 1, 2015, journal entry to retrospectively adjust the Investment in Bellevue account to the equity method. (If no entry is required for a transaction/event, select "No Journal Entry Required" in the first account field.) View transaction list

Explanation / Answer

Part a) 1) The amount to be reported for the Investment in Bellevue account is calculated as follows: Step 1: Calculate Amortization on First Purchase Purchase Cost of 15% Interest 73,400 Less Net Book Value (326,000*15%) 48,900 Value of Franchise 24,500 Annual Amortization on First Purchase (24,500/10) $2,450 _____ Step 2: Calculate Amortization on Second Purchase Purchase Cost of 10% Interest 56,820 Less Net Book Value [(326,000 + 140000 – 40,000)*10%)] 42,600 Value of Franchise 14,220 Annual Amortization on First Purchase (14220/9) $1,580 _____ Step 3: Calculate Value of Investment in Bellevue Account Purchase as on 1/1/2014 73,400 Add Income for 2014 (140000*15%) 21,000 Less Amortization on First Purchase 2,450 Payment of Dividend for 2014 (40000*15%) 6,000 Value in Investment account as on 31/12/2014 85,950 Add Purchase as on 1/1/2015 56,820 Income for 2015 (174000*25%) 43,500 Less Amortization on First Purchase 2,450 Amortization on Second Purchase 1,580 Payment of Dividend for 2015 (57000*25%) 14,250 Investment in Bellevue Account as on December 31, 2015 $167,990 2) The value of equity income is calculated as follows: Income for 2015 (174000*25%) 43,500 Less Amortization on First Purchase 2,450 Amortization on Second Purchase 1,580 Equity Income for 2015 $39,470 3)The journal entries are as follows: Description Debit Credit Journal Entry 1 Unrealized Holding Gain - Shareholder’s Equity (522500*15% - 73400) $4,975 Fair Value Adjustment (Available for Sale Securities) $4,975 (To eliminate AFS fair value adjustment account balances for the investment in Bellevue) Journal Entry 2 Investment in Bellevue (140000*15% - 2450 - 6000) $12,550 Retained Earnings $12,550 (To record retrospective adjustment) 2) The amount of income is calculated as follows: Dividend Income (57000*25%) 14,250 Appreciation in Fair Value [(573500 - 522500)*25%] 12,750 Income from Investment in Bellevue $27,000

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