Question

Milani, Inc., acquired 10 percent of Seida Corporation on January 1, 2017, for $188,000 and appropriately accounted for the investment using the fair-value method. On January 1, 2018, Milani purchased an additional 30 percent of Seida for $637,000 which resulted in significant influence over Seida. On that date, the fair value of Seida's common stock was $2,000,000 in total. Seida's January 1, 2018 book value equaled $1,850,000, although land was undervalued by $135,000. Any additional excess fair value over Seida's book value was attributable to a trademark with an 8-year remaining life. During 2018, Seida reported income of $308,000 and declared and paid dividends of $108,000. Prepare the 2018 journal entries for Milani related to its investment in Seida.

Answer 1

Milani, Inc. accounts for its investment in Seida Corporation using the equity method, making journal entries for the purchase, their share of Seida's income, dividends received, and fair value adjustments. These entries reflect the acquisition of significant influence and the associated changes in the investment value.

Step-by-step explanation:

For Milani, Inc., accounting for its investment in Seida Corporation involves making several journal entries for the year 2018 based on the equity method due to the acquisition of significant influence over Seida.

Journal Entries for Milani, Inc. in 2018

1. Recording the additional 30 percent purchase of Seida:
   Investment in Seida 637,000
   Cash 637,000
2. Adjusting the investment for Milani's share of Seida's net income:
   Investment in Seida 92,400
   Equity in Subsidiary Income 92,400
   (Note: Milani's share is 30% of 308,000.)
3. Recording dividends received:
   Cash 32,400
   Investment in Seida 32,400
   (Note: Milani's share is 30% of 108,000.)
4. Adjustment for excess land valuation and trademark:
   Investment in Seida 16,875
   Equity in Subsidiary Income 16,875
   (Note: $135,000 * 30% = $40,500 for land undervaluation; divided over 8 years = $5,062.50. Trademark excess fair value = Total FV - Book Value - Land undervaluation = $200,000-$1,850,000-$135,000 = $15,000; $15,000 * 30% = $4,500; divided over 8 years = $562.50. Annual Amortization = $5,062.50 + $562.50 = $5,625; Milani's share is 30% of $5,625 which equals $1,687.50, rounded to $1,688. During 2018, this amount should be adjusted for the full year, thus the amount is doubled to get $16,875.)

When considering the equity method of accounting, Milani recognizes its proportionate share of Seida's net income and any dividends received as well as amortization of the fair value adjustments for the assets such as land and trademark.