Question

On July 1, 2021, Clearwater Inc. purchased 9,300 shares of the outstanding common stock of Mountain Corporation at a cost of $213,000. Clearwater will have significant influence over the financial and operating policies of Mountain. Mountain had 31,000 shares of outstanding common stock. Assume the total book value and fair value of identifiable net assets is $660,000. Both companies have a January through December fiscal year. The following data pertains to Mountain Corporation during 2021:

Dividends declared and paid, Jan. 1–June 30 $11,700
Dividends declared and paid, Jul. 1–Dec. 31 $11,700
Net Income, January 1–June 30 $13,700
Net Income, July 1–December 31 $17,700

Required:
a. Prepare the entry to record the original investment in Mountain.
b. Compute the goodwill (if any) on the acquisition.
c. Prepare the necessary entries (other than acquisition) for 2021 under the equity method.

Answer 1

Answer and Explanation:

1. The journal entry is given below:

Investment in Mountain $213,000

To Cash $213,000

(Being the original investment is recorded)

Here the investment is debited as it increased the assets and credited the cash as it decreased the assets

2.

The goodwill is

Purchase price $213,000

Less : Fair value of assets purchased (30%of $660,000) $198,000

Goodwill Purchased (difference) $15,000

3.

Cash (30% × $11,700) $3,510

To Investment in Mountain $3,510

(being cash is recorded)

Investment in Mountain (30% 17,700) $5,310

To Investment Revenue $5,310

(Being investment is recorded)