7/16/2020 Assignment Print View

Score: 20/20 Points 100 %

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1. Award: 20 out of 20.00 points  

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 $1,208,000 for a 55% interest in the venture. Amco contributed plant and equipment with a carrying
amount of $1,135,000 and a fair value of $1,440,000, and received a 45% interest in the venture plus $452,000 in cash. On
December 31, Year 1, Bearcat reported a profit of $182,000 and declared a dividend of $77,000. Amco has a December 31 year-end
and will account for its 45% 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 $452,000. 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.)

No Date General Journal Debit Credit

1 Jan 1, Year 1 Cash  452,000 

Investment in Bearcat  988,000 

Plant and equipment  1,135,000 

Unrealized gain - contra account  137,250 

Gain on transfer to Bearcat  167,750 

2 Dec 31, Year 1 Investment in Bearcat  81,900 

Equity method income  81,900 

3 Dec 31, Year 1 Dividend receivable  34,650 

Investment in Bearcat  34,650 

4 Dec 31, Year 1 Unrealized gain - contra account  6,863 

Gain on transfer to Bearcat  6,863 

(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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No Date General Journal Debit Credit

1 Jan 1, Year 1 Cash  452,000 

Investment in Bearcat  988,000 

Plant and equipment  1,135,000 

Unrealized gain - contra account  209,264 

Gain on transfer to Bearcat  95,736 

2 Dec 31, Year 1 Investment in Bearcat  81,900 

Equity method income  81,900 

3 Dec 31, Year 1 Dividend receivable  34,650 

Investment in Bearcat  34,650 

4 Dec 31, Year 1 Unrealized gain - contra account  10,463 

Gain on transfer to Bearcat  10,463 

References

Worksheet Learning Objective: 09-02

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

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 $1,208,000 for a 55% interest in the venture. Amco contributed plant and equipment with a carrying
amount of $1,135,000 and a fair value of $1,440,000, and received a 45% interest in the venture plus $452,000 in cash. On
December 31, Year 1, Bearcat reported a profit of $182,000 and declared a dividend of $77,000. Amco has a December 31 year-end
and will account for its 45% 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 $452,000. 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.)

(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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Explanation:

(a)

Fair value of plant and equipment transferred $ 1,440,000

Carrying amount on Amco's books 1,135,000
Potential gain on transfer to joint venture (Bearcat) $ 305,000
Amco's portion – 45% (unrealized) 137,250
Newstar's portion – 55% $ 167,750
Recognized on transfer
167,750
(the entire amount because the transaction has commercial substance)
Recognized later $ 0

Jan. 1, Year 1
Investment in Bearcat ($1,440,000 – $452,000) = $988,000

Dec 31, Year 1

Investment in Bearcat (45% × $182,000) = $81,900
Dividend receivable (45% × $77,000) = $34,650
Unrealized gain - contra account ($137,250/20 years) = $6,863

(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 $ 452,000

Carrying amount sold ($452,000 / $1,440,000 × $1,135,000) 356,264
Gain on transfer to Bearcat $ 95,736

Dec 31, Year 1

Unrealized gain - contra account ($209,264/20 years) = $10,463

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