Question

On January 1, 20X0, Hunter Corporation issued 8,000 of its $15 par value shares to acquire 45 percent of the shares of Arrow Manufacturing. Arrow Manufacturing's balance sheet immediately before the acquisition contained the following items:
ARROW MANUFACTURING
Balance Sheet
January 1, 20X0
Book Value Fair Value
Assets
Cash and Receivables $36,000 $36,000
Land 70,000 80,000
Buildings & Equipment (net) 126,000 156,000
Patent 80,000 80,000
Total Assets 312,000
Liabilities & Equities
Accounts Payable $126,000 126,000
Common Stock 138,000
Retained Earnings 48,000
Total Liabilities & Equities $312,000
On the date of the stock acquisition, Hunter's shares were selling at $40, and Arrow Manufacturing's buildings and equipment had a remaining economic life of 5 years. The amount of the differential assigned to goodwill is not impaired.
In the two years following the stock acquisition, Arrow Manufacturing reported net income of $85,000 and $55,000 and paid dividends of $27,000 and $45,000, respectively. Hunter used the equity method in accounting for its ownership of Arrow Manufacturing.
a. Prepare the entry recorded by Hunter Corporation at the time of acquisition.
b-1. Prepare the journal entries recorded by Hunter during 20X0 related to its investment in Arrow Manufacturing.
b-2. Prepare the journal entries recorded by Hunter during 20X1 related to its investment in Arrow Manufacturing.
c.What balance will be reported in Hunter’s investment account on December 31, 20X1?

Answer 1

Answer:

a. Entry recorded by Hunter Corporation at the time of acquisition.

DR Investment in Arrow Manufacturing (8,000 * $40) $320,000  

  CR  Common Stock (8,000 * 15)  $120,000  

   CR Additional Paid-In Capital  $200,000  

(To record acquisition of Arrow Manufacturing stock)

b-1. Journal entries recorded by Hunter during 20X0 related to its investment in Arrow Manufacturing.

DR Investment in Arrow Manufacturing (8,000 * $40) $320,000  

  CR  Common Stock (8,000 * 15)  $120,000  

   CR Additional Paid-In Capital  $200,000

   

DR Cash (27,000 * 45%) $12,150  

  CR Investment in Arrow Manufacturing Stock  $12,150  

(To record dividends from Arrow Manufacturing)

 

DR Investment in Arrow Manufacturing Stock ( $85,000 x 0.45) $38,250‬  

 CR  Income from Arrow Manufacturing  $38,250‬  

(To record equity income from Arrow Manufacturing)

 

DR Income from Arrow Manufacturing $2,700

  CR Investment in Arrow Manufacturing Stock  $2,700  

(To amortize differential assigned to buildings and equipment)

Working

Investment in Arrow Stock

(156,000 -126,000)*0.45) / 5 years remaining economic life.

b-2. The journal entries recorded by Hunter during 20X1 related to its investment in Arrow Manufacturing.

DR Cash (45,000 * 45%) $20,250  

  CR Investment in Arrow Manufacturing Stock  $20,250  

(To record dividends from Arrow Manufacturing)

 

DR Investment in Arrow Manufacturing Stock ( $55,000 x 0.45) $24,750‬  

 CR  Income from Arrow Manufacturing  $24,750‬  

(To record equity income from Arrow Manufacturing)

 

DR Income from Arrow Manufacturing $2,700

  CR Investment in Arrow Manufacturing Stock  $2,700  

(To amortize differential assigned to buildings and equipment)

c.

Purchase price on January 1, 20X0  $320,000

20X0: Income from Arrow Manufacturing    

(38,250‬ - 2,700) $35,550  

Less: Dividends received -12,150

Investment account balance, December 31, 20X0      $343,400‬

20X1: Income from Arrow Manufacturing    

($24,750‬  - $2,700) $22,050  

Dividends received -20,250  

Investment account balance, December 31, 20X1  $345,200‬