Question

On January 1, Year 1, Amco Ltd. and Newstar Inc. formed Bearcat Resources, a joint venture. Newstar contributed miscellaneous assets with a fair value of $1,556,000 for a 55% interest in the venture. Amco contributed plant and equipment with a carrying amount of $1,210,000 and a fair value of $1,740,000, and received a 45% interest in the venture plus $467,000 in cash. On December 31, Year 1, Bearcat reported a profit of $197,000 and declared a dividend of $92,000. Amco has a December 31 year-end and will account for its 45% interest using the equity method. (Assume a 20-year useful life for the plant and equipment.)

Required:

(a)

Assume that the miscellaneous assets contributed by Newstar included cash of $467,000. Also, assume that the transaction had commercial substance when Amco transferred the plant and equipment to the joint venture. Prepare Amco’s Year 1 journal entries. (Do not round intermediate calculations. Round final answers to the nearest whole dollar value.)

Transaction 1: Record the investment and transfer of asset to Bearcat.

Transaction 2 :  Record year 1 net income.

Transaction 3 : Record dividend income.

Transaction 4 : Record gain on transfer to Bearcat.

b) Assume that there was no cash in the assets contributed by Newstar and that the cash received by Amco had been borrowed by Bearcat. Also assume that the transaction did not have commercial substance when Amco transferred the plant and equipment to the joint venture. Prepare Amco’s Year 1 journal entries. (Do not round intermediate calculations. Round final answers to the nearest whole dollar value.)

Transaction 1 : Record the investment and transfer of asset to Bearcat.

Transaction 2 : Record year 1 net income.

Transaction 3 : Record dividend income.

Transaction 4 : Record gain on transfer to Bearcat.

Answer 1

Requirement a: Fair value of Plant and Equipment transferred Carrying vaue on Amco's Books Gain on transfer to Joint VentureBearcat) Amco's Portion-45%(Unrealized) Newstar's Portion-55% Recognized on Transfer (entire amount since benefits and risks transferred) Recognized Later 1740000 1210000 530000 238500 2915001 2915001 Date General Journal Debit($) Credit($) Jan. 01, Year Cash 4670001 Investment in Bearcat(1740000-467000) 12730001 Plant and Equipment 1210000 Unrealized Gain-Cntra Account 238500 Gain on transfer to Newstar 291500 [To record the transfer] Dec. 31, Year Investment in Bearcat 88650 Equity Earnings(45% x 197000) 88650 [To record the net profit] Dec. 31, Year Dividend Receivable 414001 Investment in Bearcat(45% x 92000) 414001 [To record dividend] Dec. 31, YearUnrealized gain-Contra account 119251 Gain on transfer to Newstar(238500/20 Years 11925 [To record gain on transfer]

Requirement b: Cash Received by Amco From Amco's share of the borrowing -45% From Newstar's Share-55% 467000 210150 256850 Sale Proceeds Carrying value Sold(256850/1740000 *1210000) Gain on transfer to Newstar 256856 178614 78242) Date General Journal Debit($) Credit($) Jan. 01, Year Cash 4670001 Investment in Bearcat(1740000-467000) 1273000 Plant and Equipment 1210000 Unrealized Gain-Cntra Account 238500 Gain on transfer to Newstar 78242 Deferred gain Noestar(291500-78242) 213258 To record transfer Dec. 31, Year Investment in Bearcat 88650 Equity Earnings(45% 197000) 88650 To record the net profit Dec. 31, Year Dividend Receivable 414001 Investment in Bearcat(45% x 92000) 41400 To record dividend) Dec. 31, Year Deferred gain Newstar 10663 Gain on Transfer to newstar 213258/20) 10663 [To Record Deferred Gain Dec. 31, Year Unrealized gain-Contra account 11925 Gain on transfer to Newstar (238500/20 Years 11925 To record gain on transfer