Asked by Briana Fisher on May 07, 2024
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X Ltd. and Y Ltd. formed a joint venture on joint venture called XY Inc. on January 1, 2020. X Ltd. Invested contributed equipment with a book value of $600,000 and a fair value of $2,100,000 for a 50% interest in the joint venture. On December 31, 2020, XY Inc. reported a net income of $612,000. The equipment transferred has an estimated useful life of 20 years. Ignore taxes.
Assume the transaction does not have commercial substance because X Ltd. owned a similar portion of the same type of equipment both before and after the contribution to the joint venture.
Calculate the gain on the contribution of equipment and prepare the journal entries to record the events on January 1 and December 31, 2020. Also calculate under the equity method X Ltd.'s share of net income and the amount it will recognize.
Fair value of equipment transferred to XY Inc. $2,100,000 Carrying value of the equipment on X’s books $600,000 Unrealized gain on the transfer to XY Inc.: Contra account to be netted against investment account $1,500,000\begin{array}{|l|r|}\hline \text { Fair value of equipment transferred to XY Inc. } & \$ 2,100,000 \\\hline \text { Carrying value of the equipment on X's books } & \$ 600,000 \\\hline \text { Unrealized gain on the transfer to XY Inc.: } & \\\hline \text { Contra account to be netted against investment account } &\$ 1,500,000 \\\hline\end{array} Fair value of equipment transferred to XY Inc. Carrying value of the equipment on X’s books Unrealized gain on the transfer to XY Inc.: Contra account to be netted against investment account $2,100,000$600,000$1,500,000
Commercial Substance
A situation where the risk, timing, or amount of the entity's future cash flows changes as a result of a financial transaction.
Equity Method
An accounting technique used by firms to assess the profits earned by their investments in other companies, where the investment is recorded at original cost and subsequently adjusted to reflect the investor's share of the net assets of the investee.
Carrying Value
The book value of an asset or liability on a company's balance sheet, representing its value according to accounting standards.
- Acquire knowledge on the creation of joint ventures, including the acknowledgment and assessment of assets contributed.
- Analyze the financial impact of joint ventures on the income statements and balance sheets of the investing companies, including equity method accounting.
Verified Answer
FA
Fikriyah Aqilah Mohd FadhliMay 09, 2024
Final Answer :
The journal entry to record the initial investment on January 1, 2020 is as follows:
Investment in XY Inc. $2,100,000 Equipment $600,000 Unrealized gain-contra account $1,500,000 Equity pickup: Investment in XY Inc. (50%×$612,000)$306,000 Equity earnings from JV $306,000 Unrealized gain-contra account $75,000 Gain on transfer of equipment to XY Inc. ($1,500,000/20 years )$75,000\begin{array}{|c|r|r|}\hline \text { Investment in XY Inc. } & \$ 2,100,000 \\\hline \text { Equipment } & & \$ 600,000 \\\hline \text { Unrealized gain-contra account } & & \$ 1,500,000 \\\hline \text { Equity pickup: } & & \\\hline \text { Investment in XY Inc. }(50 \% \times \$ 612,000) & \$ 306,000 \\\hline \text { Equity earnings from JV } & & \$ 306,000 \\\hline \text { Unrealized gain-contra account } & \$ 75,000 & \\\hline \text { Gain on transfer of equipment to XY Inc. } & & \\\hline(\$ 1,500,000 / 20 \text { years }) & & \$ 75,000 \\\hline\end{array} Investment in XY Inc. Equipment Unrealized gain-contra account Equity pickup: Investment in XY Inc. (50%×$612,000) Equity earnings from JV Unrealized gain-contra account Gain on transfer of equipment to XY Inc. ($1,500,000/20 years )$2,100,000$306,000$75,000$600,000$1,500,000$306,000$75,000
Investment in XY Inc. $2,100,000 Equipment $600,000 Unrealized gain-contra account $1,500,000 Equity pickup: Investment in XY Inc. (50%×$612,000)$306,000 Equity earnings from JV $306,000 Unrealized gain-contra account $75,000 Gain on transfer of equipment to XY Inc. ($1,500,000/20 years )$75,000\begin{array}{|c|r|r|}\hline \text { Investment in XY Inc. } & \$ 2,100,000 \\\hline \text { Equipment } & & \$ 600,000 \\\hline \text { Unrealized gain-contra account } & & \$ 1,500,000 \\\hline \text { Equity pickup: } & & \\\hline \text { Investment in XY Inc. }(50 \% \times \$ 612,000) & \$ 306,000 \\\hline \text { Equity earnings from JV } & & \$ 306,000 \\\hline \text { Unrealized gain-contra account } & \$ 75,000 & \\\hline \text { Gain on transfer of equipment to XY Inc. } & & \\\hline(\$ 1,500,000 / 20 \text { years }) & & \$ 75,000 \\\hline\end{array} Investment in XY Inc. Equipment Unrealized gain-contra account Equity pickup: Investment in XY Inc. (50%×$612,000) Equity earnings from JV Unrealized gain-contra account Gain on transfer of equipment to XY Inc. ($1,500,000/20 years )$2,100,000$306,000$75,000$600,000$1,500,000$306,000$75,000
Learning Objectives
- Acquire knowledge on the creation of joint ventures, including the acknowledgment and assessment of assets contributed.
- Analyze the financial impact of joint ventures on the income statements and balance sheets of the investing companies, including equity method accounting.