Equity Method: Cost Greater than Book Value On January 1 of Year 1, Dridge Compa

Question

Equity Method: Cost Greater than Book Value

On January 1 of Year 1, Dridge Company purchased 2,500 shares of the 10,000 outstanding shares of Company C for a total of $100,000. At the time of the purchase, the book value of Company C's equity was $300,000. Company C assets having a fair value greater than book value at the time of the acquisition were as follows:

Company C's net income in Year 1 was $70,000. Dividends per share paid by Company C were $2.00 in Year 1.

1. Make all journal entries necessary on Dridge's books to record its investment in Company C in Year 1 as follows: (1) acquire investment, (2) record Dridge's share of income, (3) record dividends received, and (4) the amortization of the excess purchase price over book value. Assume that the goodwill is not impaired.

2. Compute the Year 1 ending balance in Dridge Company's investment in Company C account.

Explanation / Answer

Journal Entries & Working Notes Journal Entries for Investment in C Company Amount $ Debit Credit 1 Investment in Shares of Company C A/c Dr.       85,000 To Bank Account       85,000 (Being 2500 shares purchased in Company C at price of Rs.34 per share 2 Amount Receivable Dr.       17,500 To Income From Investments       17,500 Being amount of income from 2500 Shares receivable ( Note : The share of income may not be recognise ,unless the certainity in the Income 3 Bank A/c Dr        5,000 To Income from Dividends        5,000 ( Being amount received as Dividend 2$ per share for 2500 shares) 4 Profit & Loss A/c Dr.        2,500 Investment in Shares of Company C        2,500 (Being amount paid excess over the Book Value , Amortising for a period of 10 years) 2 Computaion of the Year End Closing Balance Amount $ Amount of Shares Purchased       85,000 Less : Amortised Excess Price        2,500 Closing Value of the Investment       82,500 Working Notes Amount $ Book Value Fair Value Inventory        40,000        50,000 Building       200,000       250,000 Good Will              -          40,000 Total     240,000     340,000 Number of Shares        10,000        10,000 Share Price              24              34 Excess Purchase Price              10 Number of Shares          2,500        25,000

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