Errant Inc. purchased 100% of the outstanding voting shares of Grub Inc. for $200,000 on January 1, 2019. On that date, Grub Inc. had common shares and retained earnings worth $100,000 and $60,000, respectively. Goodwill is tested annually for impairment. The balance sheets of both companies, as well as Grub’s fair market values on the date of acquisition are disclosed below:
|Errant Inc.||Grub Inc.||Grub Inc.|
|(carrying value)||(carrying value)||(fair value)|
|Total Liabilities and Equity||$660,000||$300,000|
The net incomes for Errant and Grub for the year ended December 31, 2019 were $160,000 and $90,000 respectively. Grub paid $9,000 in dividends to Errant during the year. There were no other inter-company transactions during the year. Moreover, an impairment test conducted on December 31, 2019 revealed that the Goodwill should actually have a value of $20,000. Both companies use a FIFO system, and most of Grub’s inventory on the date of acquisition was sold during the year. Errant did not declare any dividends during the year.
a). Assume that any difference between the fair values and book values of the equipment, trademark and bonds payable would all be amortized over 10 years.
b). Assume that Errant Inc. uses the equity method unless stated otherwise.
c). What would be Errant’s journal entry to record the amortization of the acquisition differential (excluding any goodwill impairment) on December 31, 2019?
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Debit Credit Investment in Grub $16,000 Equity method income
Debit Credit Equity method income $18,800 Investment in Grub $18,800
Debit Credit Equity method income $16,000 Investment in Grub $16,000
Debit Credit Investment in Grub $18,800 Equity method income $18,800