On January 1, 2016, Day Corporation purchased 30% of Night Corporation for $770,000 cash. On the date of the purchase, Night’s assets had a book value of $2,200,000 and liabilities with a book value of $400,000. In addition, Night’s equipment (4-year remaining life) was undervalued by $80,000 and its buildings (10-year remaining life) were undervalued by $120,000. Assume the purchase allows Day to significantly influence the investee corporation.
1. Prepare the allocation of the purchase of Night Corporation; show all of your calculations in good form:
2. Journalize the January 1, 2016 purchase of the Night shares:
3. On June 1, 2016, Night declared a dividend of $20,000. Journalize Day’s entry to record to dividend declaration on Day’s books:
4. On June 28, 2014, journalize the receipt of the Night dividend: 2
5. Assume that during the year, Day transferred (sold) inventory to Night at a transfer price of $80,000 and a cost of $60,000. At December 31, 2016, Night had $12,000 of ending inventory (at transfer price). Calculate the unrealized gross profit on unsold goods (round the gross profit rate to the nearest thousandth); show your calculations in good form. Also, prepare the adjusting entry to record the deferral of gross profit on the unsold goods:
6. At December 31, 2016, assume Night Corp. earned $240,000 in income. Journalize the accrual of the investee corporation’s earnings. Show your calculations in good form:
7. At December 31, 2016, prepare the adjusting journal entry to record the excess amortization of the investee: 3
8. Assume in January, 2017, Night sells the remaining inventory. Prepare the journal entry to recognize the gross profit on the sale of the goods: