7/15/2020 UNNAMED ASSIGNMENT

 
 1. Award: 10.00 points Problems? Adjust credit for all students.

On January 1, Year 1, Amco Ltd. and Newstar Inc. formed Bearcat Resources, a joint venture. Newstar contributed miscellaneous assets
with a fair value of $2,082,000 for a 65% interest in the venture. Amco contributed plant and equipment with a carrying amount of $1,170,000
and a fair value of $1,580,000, and received a 35% interest in the venture plus $459,000 in cash. On December 31, Year 1, Bearcat reported
a profit of $189,000 and declared a dividend of $84,000. Amco has a December 31 year-end and will account for its 35% interest using the
equity method. (Assume a 20-year useful life for the plant and equipment.)
Required:
(a)
Assume that the miscellaneous assets contributed by Newstar included cash of $459,000. Also, assume that the transaction had commercial
substance when Amco transferred the plant and equipment to the joint venture. Prepare Amco’s Year 1 journal entries. (Do not round
intermediate calculations. Round final answers to the nearest whole dollar value.)

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7/15/2020 UNNAMED ASSIGNMENT

No Date General Journal Debit Credit

1 Jan 1, Year 1 Cash 459,000
Investment in Bearcat 1,121,000
Plant and equipment 1,170,000
Unrealized gain - contra account 143,500
Gain on transfer to Bearcat 266,500

2 Dec 31, Year 1 Investment in Bearcat 66,150

Equity method income 66,150

3 Dec 31, Year 1 Dividend receivable 29,400

Investment in Bearcat 29,400

4 Dec 31, Year 1 Unrealized gain - contra account 7,175

Gain on transfer to Bearcat 7,175

(b) Assume that there was no cash in the assets contributed by Newstar and that the cash received by Amco had been borrowed by
Bearcat. Also, assume that the transaction did not have commercial substance when Amco transferred the plant and equipment to the joint
venture. Prepare Amco’s Year 1 journal entries. (Do not round intermediate calculations. Round final answers to the nearest whole
dollar value.)

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7/15/2020 UNNAMED ASSIGNMENT

No Date General Journal Debit Credit

1 Jan 1, Year 1 Cash 459,000
Investment in Bearcat 1,121,000
Plant and equipment 1,170,000
Unrealized gain - contra account 290,892+/-1
Gain on transfer to Bearcat 119,108+/-1

2 Dec 31, Year 1 Investment in Bearcat 66,150

Equity method income 66,150

3 Dec 31, Year 1 Dividend receivable 29,400

Investment in Bearcat 29,400

4 Dec 31, Year 1 Unrealized gain - contra account 14,545+/-1

Gain on transfer to Bearcat 14,545+/-1

 
Explanation:

(a)

Fair value of plant and equipment transferred $ 1,580,000

Carrying amount on Amco's books 1,170,000
Potential gain on transfer to joint venture (Bearcat) $ 410,000
Amco's portion – 35% (unrealized) 143,500
Newstar's portion – 65% $ 266,500
Recognized on transfer 266,500

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7/15/2020 UNNAMED ASSIGNMENT

(the entire amount because the transaction has commercial substance)

Recognized later $ 0

Jan. 1, Year 1
Investment in Bearcat ($1,580,000 – $459,000) = $1,121,000

Dec 31, Year 1

Investment in Bearcat (35% × $189,000) = $66,150
Dividend receivable (35% × $84,000) = $29,400
Unrealized gain - contra account ($143,500/20 years) = $7,175

(b)
Since the transaction does not have commercial substance, a gain can only be recognized to the extent of portion realized via cash
regardless of whether it was received indirectly from Newstar or borrowed by the joint venture.

Cash received by Amco (deemed to be proceeds from partial sale $ 459,000

Carrying amount sold ($459,000 / $1,580,000 × $1,170,000) 339,892
Gain on transfer to Bearcat $ 119,108

Dec 31, Year 1

Unrealized gain - contra account ($290,892/20 years) = $14,545

References

Worksheet Learning Objective: 09-02

Describe and apply the
current accounting standards
that govern the reporting of
interests in joint
arrangements.

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