Question

On January 2, 2014, Best Beverages acquired 45 percent of the stock of Better Bottlers for $30 million in cash. Best Beverages accounts for its investment using the equity method. At the time of acquisition, Better Bottlers' balance sheet was as follows ( in millions ) :

Better Bottlers
Balance Sheet
January 2, 2014
(in millions)
Assets
Current assets $20
Property and equipment, net 415
Patents and trademarks 150
Total assets $585
Liabilities and equity
Current liabilities $ 42
Long-term debt 518
Total liabilities 560
Capital stock 12
Retained earnings 13
Total equity 25
Total liabilities and equity $585
Valuation of Better Bottlers' assets and liabilities revealed that its reported patents and trademarks (10-year life) had a fair value of $160 million and it had unrecognized brand names (15-year life) worth $9 million. Better Bottlers' December 31, 2017, retained earnings balance is $25 million. For 2017, it reported net income of $2.5 million and paid $650,000 in dividends.
For all answers below, enter the complete figures using all zeros. For example, $1 million should be entered as 1,000,000.
Required
(a) Prepare the 2017 entries to report the above information on Best Beverages' books.
General Journal
Description Debit Credit
Answer: Cash Loss on hedgingInterest expense Investment in Better Bottlers AnswerIncorrect AnswerCorrect
Answer Cash Gain on hedging Equity in net income of Better BottlersInterest expense AnswerCorrect AnswerIncorrect
To accrue earnings of the investee.
Answer Interest expense Cash Loss on hedging Investment in swaps AnswerIncorrect AnswerCorrect
Answer Investment in Better Bottlers Interest expense Gain on hedging Cash AnswerCorrect AnswerIncorrect
To record receipt of declared dividends.
(b) Calculate the Investment in Better Bottlers balance, reported on Best Beverages' December 31, 2017 balance sheet.
$Answer

Answer 1

Calculation of 2014 equity in net income

Better Bottler's net income $1,125,000

($2,500,000* 45%)

Less: Amortization of patents and $450,000

trademarks revaluation

(160-150* 1000,000/10 at 45%)

Less: Amortization of brand names $270,000

($9000,000 /15 at 45%)

Equity in net income of Better bottles $405,000

Journal entries

Description Debit Credit

Investment in better bottles $405,000

Equity in net income of better bottle $405,000

Cash $292,500

($650,000 * 45%)

investment in better bottles $292,500

b) Calculation of investment balance

Investment balance, Jan 2,2014 $30,000,000

+ Reported income less dividends $5,400,000

($25,000,000 equity - $13,000,000 retained

earnings) * 45%

- 4 yr of revaluation write off

($450,000 * 4) $1,800,000

($270,000 *4) $1,080,000

Investment balance, Dec 31, 2017 $32,520,000