Chapter $1$ Fair Value and Equity Investments $($Ch $1$ in class ex$,$ text $37,42$ and $43)$

On January $1,2020$ Apple purchased $10\%$ of the outstanding common stock of Target Co$.$ for

$$200,000.$ The total fair value of Target Co$.$ is $$2,000,000.$ Apple accounts for this investment

at fair value as trading securities$.$

On June $30,2021,$ Apple purchased an additional $20\%$ of Targets outstanding common stock for

$$520,000.$ The total fair value of Target is $$2,600,000.$ Apple now has significant influence over

Target and must apply the equity method of accounting. At June $30,2021,$ Target$$s book value

is $$2,250,000$ and has intangible assets with a book value of $$50,000$ and a fair value of

$$200,000.$ The intangibles have a $9$ year life. Any other excess of fair value over book value is

allocated to goodwill. During $2020,2021$ and $2022$ the following activity occurred for Target:

$202020212022$

Net Income $($loss$)$ $$600,000($$$200,000)$ $$80,000$

Dividends paid $50,00050,00050,000$

Fair value of stock at $12/312,400,0002,500,0003,200,000$

Book value of equity $12/312,350,0002,100,0002,130,000$

Target gross profit percentage $20\%15\%15\%$

Target sells inventory to Apple. Apple holds Target inventory at the end of $2020,2021$ and $2022$

valued at $$10,000,$ $$20,000$ and $$25,000,$ respectively. The inventory is consumed in the

following year. Assume income is earned evenly throughout the year and dividends are paid only

at year end. Apple and Target both have December $31$ year ends.

a$.$ Prepare the journal entries to account for the investment under the fair value method $$

trading securities for $2020.$