Reference no: EM132865803
Question - Prospect Inc. is a public company. On January 1, 2019 Prospect Inc. purchased 10,000 common shares (10%) of Silverbrook Inc. for $75,000 in cash. Silverbrook had common shares of $225,000 and retained earnings of $475,000 on this date. Prospect considered Silverbrook a FVTPL investment; as it did not give Prospect significant influence. On December 31, 2019 the Silverbrook shares were trading at $9.50 per share.
On January 1, 2020, Prospect purchased an additional 30% of Silverbrook's shares for $285,000 in cash. This second purchase allowed Prospect to exert significant influence over Silverbrook. The following information was available on the date of acquisition:
Carrying Value Fair Value
Assets not subject to depreciation $205,000 $205,000
Assets subject to depreciation (10 year useful life) 620,000 775,000
Patent (7 year useful life) - 35,000
Liabilities 115,000 115,000
Silverbrook depreciates assets using the straight-line method and has a 35% tax rate.
During the two years, Silverbrook reported the following:
Net Income Dividends Declared
2019 $275,000 $75,000
2020 $175,000 $115,000
Additional Information
Silverbrook pays any dividends declared in cash on January 1 of the subsequent year.
On December 31, 2020, an impairment test revealed that Prospect's share of Silverbrook's goodwill was impaired by $7,500.
The 2020 net income included a loss from discontinued operations of $40,000 (net of tax).
REQUIRED - Prepare all of Prospect's journal entries for 2019 and 2020 related to Prospect's investment in Silverbrook.