Question

On January 1, 2018, Alamar Corporation acquired a 40 percent interest in Burks, Inc., for $210,000. On that date, Burks's balance sheet disclosed net assets with both a fair and book value of $360,000. During 2018, Burks reported net income of $80,000 and declared and paid cash dividends of $25,000. Alamar sold inventory costing $30,000 to Burks during 2018 for $40,000. Burks used all of this merchandise in its operations during 2018. Prepare all of Alamar's 2018 journal entries to apply the equity method to this investment. (If no entry is required for a transaction/event, select "No journal entry required" in the first account field.)

Answer 1

Answer:

Burks investment 144,000 debit

goodwill                  66,000 debit

                 cash                        210,000 credit

--to record acquisition---

Burks investment 32,000 debit

     gains on investent       32,000 credit

-- to record income on investment---

cash                      10,000 debit

Burks investment              10,000 credit

-- to record dividends of Burks ---

Explanation:

proportional equity:

360,000 x 0.4 = 144,000

acquired by       210,000

goodwill               66,000

divdends: 25,000 x 0.4 = 10,000

net income 80,000 x 0.4 = 32,000

For the ivnentory no entry is needed as Bursk used the entire inventory there is not unrealized gain.