Required:

1. Prepare the entry to record the original investment in Mountain.

2. Compute the goodwill (if any) on the acquisition.

3. Prepare the necessary entries (other than acquisition) for 2006 under the equity method.

Answer:

(1.)	Investment in Mountain	140,000
	Cash		140,000
(2.)	Purchase price	140,000
	Fair value of assets purchased
	($650,000 x 20%)	130,000
	Goodwill purchased (difference)	$10,000
(3.)	Cash ($12,000 x 20%)	2,400
	Investment in Mountain		2,400
	Investment in Mountain ($18,000 x 20%)	3,600
	Investment revenue		3,600

Learning Objective: 6 Level of Learning: 3

122. On July 1, 2006, Clearwater Inc. purchased 6,000 shares of the outstanding common stock of Mountain Corporation at a cost of $140,000. Mountain had 30,000 shares of outstanding common stock. The book value and fair value of net assets is $650,000. Both companies have a January through December fiscal year. The following data pertain to Mountain Corporation during 2006:

Net income, January 1 - June 30	$14,000
Net income, July 1 – December 31	$18,000
Dividends declared and paid, Jan. 1 - Jun .30	$12,000
Dividends declared and paid, Jul. 1 - Dec. 31	$12,000

Required:

1. Prepare the necessary entries for 2006 under the equity method (other than for the purchase).

2. Prepare any necessary entries for 2006 (other than for the purchase) that would be required under the cost method.

Answer:

(1.)	Cash ($12,000 dividends x 20%)	2,400
	Investment in Mountain		2,400
	Investment in Mountain ($18,000 NI x 20%)	3,600
	Investment revenue		3,600
(2.)	Cash ($12,000 dividends x 20%)	2,400
	Dividend income		2,400

Learning Objective: 5 Level of Learning: 3