Why Choose Us?
0% AI Guarantee
Human-written only.
24/7 Support
Anytime, anywhere.
Plagiarism Free
100% Original.
Expert Tutors
Masters & PhDs.
100% Confidential
Your privacy matters.
On-Time Delivery
Never miss a deadline.
On January 1, Year 1, Head Ltd
On January 1, Year 1, Head Ltd. purchased 50,000 common shares, representing 40% of the outstanding shares, of Toe Ltd. for $800,000. The assets of Toe included a building with a market value $300,000 greater than book value. The building had a remaining useful life of 10 years.
During Year 1, Toe had a net income of $200,000 and paid dividends of $80,000. During Year 1, Head sold Toe merchandise for $240,000 at a gross profit rate of 40%. At year end, 50% of this merchandise remained in Toe’s inventory. Head’s tax rate is 30%.
During Year 2, Toe had a net income of $240,000 and paid dividends of $140,000. At year end, the market price of the shares was $18.
-
a) Provide all the necessary Year 1 journal entries for Head Ltd. from purchase to all year-end adjustments, assuming they have significant influence.
-
b) Show all calculations necessary to determine the end of Year 2 balance in Head’s “Investment in Toe” account. Use a table format with one line per item and label each item. Provide the ending balance.
Expert Solution
a) Provide all the necessary Year 1 journal entries for Head Ltd. from purchase to all year-end adjustments, assuming they have significant influence.
Answer:
| No | Date | General Journal | Debit | Credit |
| 1 | Jan 1, Year 1 | Investment in Toe | 800,000 | |
| Cash | 800,000 | |||
| To record the purchase of 40% of Toe | ||||
| 2 | Dec 31, Year 1 | Investment in Toe | 80,000 | |
| Investment income | 80,000 | |||
| To record the share of Head in Toe's income | ||||
| 3 | Dec 31, Year 1 | Cash | 32,000 | |
| Investment in Toe | 32,000 | |||
| To record the share of Head in Toe's dividend | ||||
| 4 | Dec 31, Year 1 | Investment income | 12,000 | |
| Investment in Toe | 12,000 | |||
| To record the amortization of acquisition differential | ||||
| 5 | Dec 31, Year 1 | Investment income | 13,440 | |
| Investment in Toe | 13,440 | |||
| To record the elimination of inventory profits |
b) Show all calculations necessary to determine the end of Year 2 balance in Head’s “Investment in Toe” account. Use a table format with one line per item and label each item. Provide the ending balance.
Answer:
|
Balance at the beginning of Year 1 |
800,000 |
|
Add: Year 1 investment income from Toe |
80,000 |
|
Less: Year 1 Dividends from Toe |
(32,000) |
|
Less: Accumulated Depreciation Amortization |
(12,000) |
|
Less: Intercompany inventory profits |
(13,440) |
|
Balance at the beginning of Year 2 |
822,560 |
|
Add: Year 2 investment income from Toe |
96,000 |
|
Less: Year 2 Dividends from Toe |
(56,000) |
|
Less: Accumulated Depreciation Amortization |
(12,000) |
|
Balance at the end of Year 2 |
850,560 |
Calculation:
a.
Entry #2:
To record the share of Head in Toe's income
Net income of $200,000 x 40% share = 80,000
Entry #3:
To record the share of Head in Toe's dividend
Paid dividends of $80,000. So 80,000 x 40% share = 32,000
Entry #4:
To record the amortization of acquisition differential
Building has a market value $300,000 greater than book value
Life = 10 years
So, (300,000 x 40% share)/10 years = 12,000
Entry #5:
To record the elimination of inventory profits
Sale of merchandise = $240,000
Gross profit rate = 40%
Merchandise remained in Toe’s inventory = 50%.
Head’s tax rate = 30%.
Inventory profit elimination = 240,000 x 40% x (1-30%) x 50% x 30% = 13,440
b.
To calculate the end of Year 2 balance in Head’s Investment in Toe, first we need to determine the Balance at the beginning of Year 2. For that we need to add the Year 1 investment income from Toe to the Balance at the beginning of Year 1. Then we need to deduct the Year 1 Dividends from Toe, Accumulated Depreciation Amortization and the Intercompany inventory profits.
Then we get the Balance at the beginning of Year 2. Next we need to add the Year 2 investment income from Toe.
Year 2 investment income from Toe = Net income of $240,000 x 40% share = 96,000
Then we need to deduct the Year 2 Dividends from Toe
Paid dividends of $140,000. So 140,000 x 40% share = 56,000
Then we need to deduct the Accumulated Depreciation Amortization of 12,000 which is same for all years
Archived Solution
You have full access to this solution. To save a copy with all formatting and attachments, use the button below.
For ready-to-submit work, please order a fresh solution below.
