Part A Banana Corporation sought to diversify its operations

Part A: Banana Corporation sought to diversify its operations and purchased a 25% interest in Walnut Co., on January 1, 2017 for $330,000 cash. On that date, Walnut\'s stockholders\' equity included $205,000 of $5 par value common stock, $250,000 of additional paid in capital, and $350,000 retained earnings. On this date, it was determined that Walnut\'s building had a fair value of $140,000 more than its book value and a remaining useful life of 15 years. Any additional excess of the purchase price is considered goodwill related to the investment. During the 2017 and 2018, Walnut reports the following information about its operations: 2017 2018 Net Income 110,000 120,000 Dividends 10,000 | 12,000 Market Price (12/31) $ 38.50 $ 37.25 * Market price is the trading price of one share of Walnut\'s common stock. Required: (Assume Banana Corporation has significant influence over Walnut Co.) 1. Prepare all of the journal entries Banana Corporation makes during 2017 and 2018 to record its investment activities for Walnut Co. (Use the space provided on the back of this page for your journal entries.) What amount would Banana show on its December 31, 2018 balance sheet for Investment in Walnut? (Show your detailed and labeled calculations.) 3. What amount would Banana show as its Income from Walnut on its income statement for the year ended December 31, 2017?

Solution

2.

3.

Income from Walnut Co. for the year 2017 in the books of Banana Company = $27,500 (25% of $110,000)

1. Journal entries in the books of Banana Corporation
Date	Account Title	Debit	Credit
Jan.1, 2017	Investment in Walnut Co.	330000
	Cash		330000
	(Cash paid for 25% interest in Walnut Co.)
Dec.31, 2017	Amortization expense	7021
	Investment in Walnut Co.		7021
	(Amortization of excess value paid for 25% interest )
Dec.31, 2017	Investment in Walnut Co.	27500
	Equity income from Walnut		27500
	(25% interest in the net income of Walnut Co. for the year 2017)
Dec.31, 2017	Cash	2500
	Investment in Walnut Co.		2500
	(Dividend received from Walnut Co. Being 25% of $10,000)
Dec.31, 2018	Amortization expense	7021
	Investment in Walnut Co.		7021
	(Amortization of excess value paid for 25% interest )
Dec.31, 2018	Investment in Walnut Co.	30000
	Equity income from Walnut		30000
	(25% interest in the net income of Walnut Co. for the year 2018)
Dec.31, 2018	Cash	3000
	Investment in Walnut Co.		3000
	(Dividend received from Walnut Co. Being 25% of $12,000)