On January 2 2018 Johnson Company paid 310 million to acquir

On January 2, 2018, Johnson Company paid $310 million to acquire 14,000,000 shares of Pets Corp. The investment represented 30% of the total shares outstanding of Pets Corp. and gave Johnson Company the ability to exert significant influence upon the operations of Pets Corp.

During the year ended December 31, 2018, Pets Corp. paid dividends of $1.10 per share (declared and paid on November 12, 2018) and reported income of $245 million. The market value of Pets Corp. stock at December 31, 2018, was $24.50 per share. On the date of the acquisition the book value of Pets Corp. was $950 million and the fair value of the assets at that time were consistent with the book value except for Equipment which was undervalued by $40.0 million, with a remaining life of 10 years. Any excess fair value attributable to the acquisition (over cost of acquisition) was applied to goodwill.

Prepare all journal entries related to the investment for 2018, assuming Johnson uses the equity method to account for acquisition.

Show your work representing the development and allocation of the consideration paid.

Solution

Johnson Company (in millions) Date Account title Debit Credit Jan.2, 2018 Investment in Pets Corp. 310.00 Cash 310.00 (Cash paid to acquire 30% interest in Pets Corp.) Dec.31, 2018 Amortization expense 1.20 Investment in Pets Corp. 1.20 (Amortization of equipment acquired) Dec.31, 2018 Amortization expense 0.65 Investment in Pets Corp. 0.65 (Amortization of goodwill) Dec.31, 2018 Cash 15.40 Investment in Pets Corp. 15.40 (Dividend received on 14,000,000 shares @$1.10 per share) Dec.31, 2018 Investment in Pets Corp. 73.50 Equity income from Pets Crp. 73.50 (Equity income from Pets Corp. Being 30% of $245 million) Working: Price paid for 30% interest (A) 310.00 Fair value of the net assets                       (B) 950.00 Undervaluation of equipment                 (C) 40.00 Total value at the date of acquisition   (D) 990.00 Fair value of 30% interest (B+C+D)      (E) 297.00 Goodwill                                              (A - E) 13.00 Excess of fair value for equipment 40.00 30% interest in the excess 12.00 Remaining life    (years) 10.00 Annual amortization on equipment 1.20 Expected life of goodwill (presumed)   -- years 20.00 Annual amortization on goodwill 0.65