Question

On January 1, 2018, Alamar Corporation acquired a 45 percent interest in Burks, Inc., for $196,000. On that date, Burks's balance sheet disclosed net assets with both a fair and book value of $350,000. During 2018, Burks reported net income of $81,000 and declared and paid cash dividends of $20,000. Alamar sold inventory costing $28,000 to Burks during 2018 for $41,000. Burks used all of this merchandise in its operations during 2018. Prepare all of Alamar's 2018 journal entries to apply the equity method to this investment.

Answer 1

Answer:

1. Dr Investment in Burks Inc $196,000

Cr Cash $196,000

2. Dr Investment in Burks Inc $42,300

Cr Investment income in Burks Inc $42,300

3. Dr Cash $9,000

Cr Investment income in Burks Inc $9,000

Explanation:

Preparation for Journal entries

1. Dr Investment in Burks Inc $196,000

Cr Cash $196,000

2. Dr Investment in Burks Inc $42,300

Cr Investment income in Burks Inc $42,300

3. Dr Cash $9,000

Cr Investment income in Burks Inc $9,000

CALCULATION for Journal entry (2)

Unadjusted Net income $81,000

Profit from sale of inventory to burks $13,000

(41,000-28,000)

Adjusted Net Income $94,000

Share of Alamar 45%

Share of Alamar in Burks Inc income $42,300

(94,000*45%)

CALCULATION for Journal entry (3)

Cash dividends $20,000

Share of Alamar 45%

Share of Alamar in Burks Inc dividends $9,000