Computations and journal entries with excess of book value over fair value
Jen Corporation became a subsidiary of Laura Corporation on July 1, 2011, when Laura paid $1,980,000 cash for 90 percent of Jen’s outstanding common stock. The price paid by Laura reflected the fact that Jen’s inventories were undervalued by $50,000 and its plant assets were overvalued by $500,000. Jen sold the undervalued inventory items during 2011 but continues to hold the overvalued plant assets that had a remaining useful life of nine years from July 1, 2011.
During the years 2011 through 2013, Jen’s paid in capital consisted of $1,500,000 capital stock and $500,000 additional paid in capital. Jen’s retained earnings statements for 2011, 2012, and 2013 were as follows (in thousands):
|
Year Ended December 31, 2011 |
Year Ended December 31, 2012 |
Year Ended December 31, 2013 |
|
|
Retained earnings January 1 |
$525 |
$600 |
$700 |
|
Add: Net income |
250 |
300 |
200 |
|
Deduct: Dividends (declared |
|||
|
in December) |
(175 ) |
(200 ) |
(150 ) |
|
Retained earnings December 31 |
$600 |
$700 |
$750 |
Laura uses the equity method in accounting for its investment in Jen.
REQUIRED
1. Compute Laura Corporation’s income from its investment in Jen for 2011.
2. Determine the balance of Laura Corporation’s Investment in Jen account at December 31, 2012.
3. Prepare the journal entries for Laura to account for its investment in Jen for 2013.