In 2018 Babcock Industries a calendar year corporation acqui

In 2018, Babcock Industries, a calendar year corporation, acquired a 10% interest in Caraway, Inc. for $65,000. Babcock appropriately used the fair value method to account for the investment.   At the beginning of 2021, Babcock acquired an additional 25% of the outstanding common stock of Caraway for $250,000. The following additional information is available at the date of purchase related to Caraway’s activity for the years 2018-2020:

Cumulative dividends paid by Caraway                                                          $150,000

Cumulative income reported by Caraway $400,000

Cumulative fair value adjustment in Babcock’s balance sheet

At 12/31/20 $ 35,000

Caraway’s balance sheet on the date of the additional purchase is as follows:

Accounts receivable         $100,000                                Mortgage payable                                $200,000

Inventories                             200,000

Building                                   400,000 Stockholders’ equity                          500,000

Total assets                             $700,000 Total liabilities and equity              $700,000

Babcock based its price for the additional 25% investment on the fact that Caraway has developed a patent that Babcock estimates is worth $300,000. The patent will expire in 10 years.

Subsequent to the investment, Caraway reports earnings of $200,000 and pays $90,000 in dividends. In addition, Babcock sells inventories to Caraway that cost $50,000 for a sales price of $80,000. At the end of 2021, 60% of the inventories are still held by Caraway.

Provide all journal entries needed to record each of the following:

-Babcock’s additional investment in Caraway at the beginning of 2021.

-Caraway reports total earnings of $200,000 for 2021

-Babcock adjusts Caraway’s earnings for amortization of the patent

-Babcock adjusts Caraway’s earnings for deferral of gross profit on the intercompany inventory sale

-Caraway pays total dividends of $90,000

Solution

a) To record second acquisition of Caraway stock Investment in Caraway $250,000               Cash $250,000 b) Investment in Caraway $70,000         Equity Income -Investment in Caraway $70,000 ($200,000 x 35%) c) Equity Income -Investment in Caraway $12,500.00                    Investment in Caraway $12,500.00 d) Equity Income from Caraway 6300                   Investment in Caraway 6300 Ending inventory = 60% x35% (80,000 -50000) e) Dividend Receivable (90,000 x 35%) 31500              Investment in Caraway 31500 Cash 31500            Dividend Receivable (90,000 x 35%) 31500 Second Purchase Purchase price of Caraway stock $250,000.00 Less: Book value of Caraway\'s stock ($500,000 × 25%) $125,000.00 Cost in excess of book value (Patents) $125,000.00 Remaining life of patent ÷ 10 years Annual Amortization $12,500.00