Question
Kevin Corp and Keith Corp are in the landscaping business and both operate similar operations in Southern Ontario. On January 1, 2015, they formed a
Kevin Corp and Keith Corp are in the landscaping business and both operate similar operations in Southern Ontario. On January 1, 2015, they formed a joint venture called Kevith Corp in a developing region in Western Ontario. On that date, Keith Corp invested assets with a fair value of $760,000 for its 60% stake in Kevith Corp. These assets consisted of $300,000 in cash and $560,000 in machinery and equipment. Kevin Corp contributed machinery and equipment with a book value of $300,000 and a fair value of $940,000 and received a 40% stake in the venture plus $500,000 in cash. At the date of formation, $300,000 was borrowed from the bank by the joint venture.
On December 31, 2015, Kevith Corp reported net income of $400,000 and declared dividends in the amount of $60,000. The machinery and equipment are estimated to have an estimated useful life of 10 years.
Required:
Prepare Kevin Corps equity method journal entries for 2015. Briefly explain your rationale for any initial gain allowed by GAAP upon contribution of machinery and equipment by Kevin Corp.
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