Question
On 1/1/20x1, Living Technologies Company purchased an investment in the voting common stock of Home Solutions, Inc. for $100,000 cash. With its investment, Living Technologies
On 1/1/20x1, Living Technologies Company purchased an investment in the voting common stock of Home Solutions, Inc. for $100,000 cash. With its investment, Living Technologies Company did not retain significant influence over the financing and operating policies of Home Solutions
Home Solutions, Inc.s common stock is held by a small group of related investors and the fair value of that common stock is difficult to determine. But, based on the number of Home Solutions common shares outstanding, at 1/1/20x1, Living Technologies investment represents 10% of Home Solutions outstanding common shares.
On 1/1/20x3, Living Technologies Company purchased an additional 15% of Home Solutions, Inc.s outstanding voting common stock. The cost of their additional investment is $150,000, which they paid with cash. Amounts paid in excess of the book value of net assets represents an increase in value of a machinery and equipment with a remaining useful life of 5 years
With this additional investment, Living Technologies can exercise significant influence over the financing and operating policies of Home Solutions but does not retain a controlling financial interest, as defined in the accounting rules.
Relevant financial information for Home Solutions, Inc. is as follows:
Additional Information | |||
Fiscal Year-ending | |||
12/31/20x1 | 12/31/20x2 | 12/31/20x3 | |
Net income | $35,000 | $45,000 | $55,000 |
Dividends declared and paid | $5,000 | $6,500 | $8,500 |
Book value of Home Solutions net assets | $880,000 | $918,500 | $965,000 |
Required:
- Prepare the journal entry to record Living Technologies investment in Home Solutions at 1/1/20x1.
- For fiscal year 20x1 and 20x2, prepare the journal entry (or entries) for Living Technologies share of dividends and income, as applicable.
- Show the change in Living Technologies investment in Home Solutions from 1/1/20x1 to 12/13/20x3, before accounting for the additional investment.
- Prepare the journal entry for Living Technologies additional investment in Home Solutions at 12/31/20x3. (For this purpose, assume that the fair value of their initial investment was equal to the price paid to acquire that investment)
- For fiscal year 20x3, prepare journal entries for Living Technologies share of dividends and income, as applicable.
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