Question

Problem 4 (20 pts) On January 1, 2020, Jordan Inc. purchased 25% of the outstanding common stock of Melody Corporation at a cost of $450,000. Melody Corporation had 400,000 shares of common stock outstanding. At the date of purchase, the book value of Melody's net assets was $1,500,000. Book value and fair value of net assets were the same for all balance sheet items except for machinery and inventory. The fair value exceeded the book value by $100,000 for machinery and $20,000 for the Inventory. The estimated useful life of machinery is 10 years and all inventory acquired was sold during 2020. Both companies have a January through December fiscal year. Melody Corporation reported net income of $200,000 and paid cash dividend of $50,000 during 2020. Market value of Melody Corporation was $6 per share at December 31, 2020. REQUIRED (1.) Prepare the entry to record the original investment in Mountain. (2.) Compute the amount of goodwill (if any) on the acquisition. (3.) Prepare the necessary entries (other than acquisition) for 2020. (4.) Assume that on January 10, 2020 Jordan Inc, sold 40% of its investment in Melody Corporation for $220,000. Prepare the journal entry to record the sale of investment. (5). Assume that subsequent to selling 40% of the investment, Melody Corporation reported income of $250,000 and paid dividend of $40,000 for 2021. Market value of Melody Corporation's common stock was $5 per share at December 31, 2021. Prepare the journal entries (if any) for Jordan Inc. for its investment in Melody Corporation for 2021.

Answer 1

(1)	Journal Entry to record original investment
	Account Titles	Debit	Credit
	Equity Method Investment in Common Stock of Melody Corporation	450,000
	Cash		450,000
(2)	Calculation of Goodwill:
	Purchase Consideration		450,000
	Add: Non-Controlling Interest		1,215,000
	( 1,620,000 x 75% )
	Less: Net assets		1,620,000
	Book Value	1,500,000
	Add: Fair Value in excess of Book value
	Machinery	100,000
	Inventory	20,000
	Goodwill		45,000
(3)	Necessary Journal Entries
	Account Titles	Debit	Credit
	Cash	12,500
	Equity Method Investment in Common Stock of Melody Corporation		12,500
	(50,000 x 25% )
	Equity Method Investment in Common Stock of Melody Corporation	50,000
	Earning from Equity Method Investment		50,000
	(200,000 x 25% )
	Earning from Equity Method Investment	30,000
	Equity Method Investment in Common Stock of Melody Corporation		30,000
	(100,000 / 10 ) + 20,000
	(Annual amortization of machinery & Inventory sold )
(4)	Account Titles	Debit	Credit
	Cash	220,000
	Equity Method Investment in Common Stock of Melody Corporation		180,000
	(450,000 x 40% )
	Gain on sale of Equity Method Investment		40,000
(5)	Account Titles	Debit	Credit
	Cash	6,000
	Dividend Revenue		6,000
	(40,000 x 15% )
	Fair Value adjustment-Stock Investment	30,000
	Unrealized gain		30,000
	( 60,000 x 5 ) - (450,000 x 60% )
	* After selling 40% of Equity investment , remaining 15% ( 25 x 60% ) will be treated as Stock Investment.