On July 1, 2018, Gupta Corporation bought 30% of the outstanding common stock of
ID: 2536937 • Letter: O
Question
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. (amounts in millions)
Explanation / Answer
Journal entries for investment in VB Company
3M
a Investment in Gupta's balance sheet
Investment in Gupta's Balance sheet is the book value which $66Million as an investment show.
This is the rules which is keep in recording.
b. investment revenue (loss) in Gupta's 2018 income statement
Investment revenu/loss is to be show in income statement.
In equity method
a proportional share of the Gupta's net income is recognized as an increase to revenues, while a loss and the payment of dividends would decrease the value of the investment and flow to the income statement.
c. investing activities in Gupta's 2018 statement of cash flows
In cash flow statement
- Cash outflow for investment $170m
+ Cash Inflow from investment dividend $15m
Journal Debit Credit 1 Investment in VB Shares 170m Cash 170m 2 Investment in VB Shares 18M Investment Revenue 18M 3. Cash 15m Investment in VB Shares 15m 4 Investment Revenue 3M Investment in VB Shares3M
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