Question 1: On January 1, 2016, Joey Co. acquired 40% of Legoria CO.'s voting stock for $15 million cash. Legoria's book value on the date of acquisition is $6 million. A valuation analysis reveals that Legoria's Patents (10-year life) are undervalued by $1 million and it has unreported Technology (5-year life) valued at $2 million. Legoria pays dividends of $250,000 and reports net income of $900,000 in 2016.
Required
1) Give the Journal Entries on Joey Co's Books for 2016 related to its Investment in Legoria Co. using the Equity Method.
2) Does GAAP allow Joey Co. to record its 40% investment in Legoria Co using another accounting method?
a. Yes or no.
b. If answer to part a is yes, what is that accounting method?
Question 2: On January 1, 2016, Joey Co. acquired 300,000 shares, which represents 30% of Legoria CO.'s voting shares, by paying $40 per share for a total of $12,000,000 Cash. Joey Co. has significant influence over Legoria Co., and therefore the Equity Method of accounting is appropriate GAAP. On the date acquisition, Legoria Co.'s net book value is $30 Million. An analysis of Legoria's assets and liabilities indicates that plant and equipment (10 year life) is reported at $1 million less than fair value and that Legoria has unreported technology (5 year life) valued at $5 million. Legoria Co. reports net income of $2 Million for the year ended 12/31/2015. It declares a dividend of $0.50 per share on 11/1/2016 and pays the dividend on 12/1/2016.
In addition, during 2016 Legoria Co. sells inventory to Joey Co. (upstream) at an average markup of 20 percent on cost. Joey Co. still holds $210,000 of this inventory at year-end 2016. Also, during 2016, Joey Co sells inventory to Legoria Co. (downstream) at an average markup of 25 percent on cost. Legoria Co. holds $100,000 of this inventory at year-end.
Required:
Give the Journal Entries on Joey Co's Books for 2016 related to its Investment in Legoria Co. using the Equity Method.