Question

Q2: On January 1, 2018, Jolley Corp. paid $250,000 for 25% of the voting common stock of Tige Co. On that date, the book value of Tige was $850,000. A building with a carrying value of $160,000 was actually worth $220,000. The building had a remaining life of twenty years. Tige owned a trademark valued at $90,000 over cost that was to be amortized over 20 years.

During 2018, Tige sold to Jolley inventory costing $60,000, at a markup of 50% on cost. At the end of the year, Jolley still owned some of these goods with an intra-entity selling price of $33,000.

Tige reported net income of $200,000 during 2018. This amount included a extraordinary gain of $35,000. Tige paid dividends totaling $40,000.

1. Prepare all of Jolley’s journal entries for 2018 in relation to Tige Co. Assume the equity method is appropriate for use. (Record initial investment, accrual investment income, amortization, dividend, and URGP if there is any)
2. What is the investment in Tige would be reported on Jolley’s 12/31/2018 financial statements?
3. If Jolley sold half of its investment in Tige for 400,000 on 1/1/2019, calculate the cost of the investment sold and then report the gain or loss on the sale of investment.

Answer 1

Jolley Corp. Journal Enteries Trans. Particulars 1 Investment in Tige Co. a/c Dr. To Cash (To record the initial investment in Tige Co.) Debit in $ Credit in $ 250000 250000 2 Inventory a/c Dr. 90000 To Cash (To record the purchase of inventory from Tige Co.) 90000 3 50000 Investment in Tige Co. a/c Dr. To Equity in Tige Co. Income To Extraordinary Gain of Tige Co. (To record share of Tige Co.'s income) 41250 8750 4 10000 Cash a/c Dr. To Investment in Tige Co. (To record the receipt of dividend) 10000 5 Dr. 1875 Equity in Tige Co. Income a/c To Investment in Tige Co. (To record amortizations) 1875 2750 Equity in Tige Co. Income a/c Dr. To Investment in Tige Co. (To defer unrealized profit on inventory 2750

41250 Calculation of Equity in Tige Co. income: ( 200000 - 35000 ) x 25% 8750 Calculation of extraordinary gain of Tige Co. 35000 x 25% Calculation of amortizations: Building [(220000 - 160000)/20 ] x 25% Trademark [(90000 x 25%)/20] Total 750 1125 1875 Calculation of unrealized intra entity inventory profit Cost + 50% cost = 60000 + 30000 90000 Cost -60000 Gross Profit 30000 GP% = 30000 / 90000 (1/3) Remaining Inventory X 33000 Remaining Profit in ending inventory 11000 Jolly's Ownership x 25% Deferred unrealized profit in inventory - Jolley 2750