Question
On January 2, 2020, Chapman Utensil Inc. purchased 480,000 shares of Justin Spoon Corp.s common stock at $33.15 per share. The investment represented a 32%
On January 2, 2020, Chapman Utensil Inc. purchased 480,000 shares of Justin Spoon Corp.s common stock at $33.15 per share. The investment represented a 32% ownership interest that gave Chapman Utensil the ability to influence the financial and operating policies of Justin Spoon Corp. Chapman Utensil did not elect the fair value option to account for its investment.
a. Prepare the general journal entry recorded by Chapman Utensil Inc. on January 2, 2020 to recognize its investment in Justin Spoon Corp. Post the entry to the relevant T-account below. (4 points)
DATE | ACCOUNT NAMES |
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SUPPORTING CALCULATION REQUIRED:
An analysis of Justin Spoons net identifiable assets at December 31, 2018, revealed:
| Book Value | Fair Value |
Current Assets | $37,800,000 | $37,800,000 |
Plant Assets | 134,000,000 | 139,000,000 |
Intangible Assets Other than Goodwill | 9,000,000 | 17,000,000 |
Current Liabilities | 27,600,000 | 27,600,000 |
Long-Term Liabilities | 130,000,000 | 130,000,000 |
Common Stock | 2,000,000 |
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Additional Paid-In Capital | 8,000,000 |
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Retained Earnings | 11,900,000 |
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Accumulated Other Comprehensive Income | 1,300,000 |
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The plant assets and intangible assets other than goodwill were estimated to have average remaining useful lives of 10 years and 8 years, respectively.
b. Use the following table to 1) compute the total purchase price differential; 2) allocate the differential to the net identifiable assets, and; 3) determine the portion of the purchase price paid by Chapman Utensil Inc. for its share of Justin Spoon Corp. attributable to goodwill.
(12 points)
Computation and Allocation of Purchase Price Differential: |
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| Total | Investors % | Investors Total |
Purchase Price Shares |
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Carrying Value of Net Assets Acquired |
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Total Purchase Price Differential |
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Allocation to Net Identifiable Assets: |
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c. Use the following table to compute the amount of amortization of the purchase price differential paid for Justin Spoon Corp. that Chapman Utensil must record as an adjustment for the year ended December 31, 2020. (6 points)
| Investors Additional Cost | Remaining Useful life | Annual Amortization |
Plant Assets |
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Intangible Assets |
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Goodwill |
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During 2020, Justin Spoon reported net earnings of $5,540,000 and other comprehensive income of $650,000. The Company paid dividends of $2,790,000. The fair value of Justin Spoon Corp.s common stock was $38.50 per share at December 31, 2020.
d. Prepare the entries recorded by Chapman Utensils share of the net earnings and other comprehensive income of Justin Spoon and the adjustment to fair value, if necessary. (12 points)
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