Reference no: EM133171744

Question - Part 1 - On January 1st of Year 1, a company acquired 40% of the Norton Company for $3,000,000. On the date of acquisition, the book value of Norton's net assets was reported at $6,500,000. Appraisal of Norton's net assets reflected the following:

Plant and equipment is undervalued by $412,500.

Inventory is undervalued by $375,000

Land is undervalued by $100,000

All of Norton's long-term operating assets are depreciated or amortized using the straight-line method over a 15-year life. Norton uses the FIFO method to account for inventory.

The following information is provided on December 31st of Year 1:

Norton's net income is $1,825,000

Norton declared and paid dividends of $400,000

The fair value of Norton's shares is $3,450,000

The entire investment is sold on January 1st of Year 2.

Required - Prepare all journal entries necessary if Randolph uses the equity method to account for its investment in Norton. Be sure to include the amount of goodwill on the acquisition.

Part 2 - (Independent of your answer to Part 1) Randolph elected the fair value option to account for investment in Norton (or another investor now holds 60% of Norton).

Required - Prepare all journal entries necessary if Randolph uses the fair value method to account for its investment in Norton. This is the only equity security held by Randolph.