This action might not be possible to undo. Are you sure you want to continue?
Company acquired a 30% interest in Katel, Inc. on January 1, 2008, for $300,000. For the years 2008, 2009, and 2010, Katel reported net income of $250,000, $350,000, and $450,000, respectively. Dividends declared and paid by Katel were $50,000, $100,000, and $150,000, respectively. Requirement 1: Prepare journal entries on Jordan’s books for 2008 with respect to its investment in Katel. Investment in Katel, Inc. common Cash To record investment in Katel, Inc. 300,000 300,000
Investment in Katel, Inc. common 75,000 Equity in investee income Accrual entry for investment in a 30%-owned investee ($250,000 x 0.3) Cash 15,000 Investment in Katel, Inc. common To record declaration and receipt of dividends from a 30%-owned investee ($50,000 x 0.3).
Notes: 1. Katel, Inc.’s book value increased by $200,000 ($250,000 – 50,000). 2. The net change in Jordan’s investment account from equity method entries is $60,000 ($75,000 – 15,000). This is represented by 30% of the book value increase of $200,000 or $60,000.
000 x 0.000 x 0. Another way to state this is: Goodwill is the difference between the investor’s cost and the fair market value of net identifiable assets acquired.000 66.000 180. Investor’s cost Book value acquired ($600.30) Excess of cost over book value Fair value differences: Land difference ($80.000 120.000 Undervalued automobiles and trucks 100. an intangible asset with an indefinite life.000 based on their determination of the value of Katel.30) Goodwill $360.000.30) Auto and truck difference ($100. Unless impairment occurs or the investment is sold.000 Percentage 30% Price $300. As a result of SFAS 142. Inc.000 However.000 difference is considered goodwill.000 x 0. The $60. for fiscal years beginning after December 15.000 Goodwill is no longer amortized. goodwill is not written down. .000 $60. goodwill is reported as an intangible asset that is tested for possible impairment at the end of each fiscal year.Illustration 3 – Excess of Investment Cost over Book Value Acquired Let’s assume that the acquisition price for the Katel stock was determined as follows: Book value of Katel’s net assets $600.30) Intangible asset difference ($220. 2001.000 x 0.000 30.000 $24.000 Undervalued intangible assets 220.000 $180. Let’s assume the following estimated lives for the amortizable asset differences: Automobiles and trucks 10 years Intangible assets 15 years Note: Land differences are not amortizable. Therefore. goodwill represents unidentifiable assets resulting from business combinations.000 Fair value of net assets $1.000 Undervalued land 80. let’s say that Jordan makes a bid of $360.
000/10) $3. common 7.000/15) 4.Amortization for the above asset differences each year are: Automobiles and trucks ($30.400 The equity method entry for this is: Equity in investee income Investment in Katel. Inc.400 7.400 .000 Intangible assets ($66.400 $7.