Donavan Corp.
– Revisited (a)
Suppose that after the second purchase of Bailey Corp. shares, Donavan Corporation does NOT
sell off 1500 shares on July 1, 2018. Instead, on January 1, 2019, Donavan acquires another
block of 2,000 shares of Bailey Corp. At such time, the shares have a market value of $250.00
each. There is no change to the number of shares outstanding, which remains at 10,000 shares.
An analysis of the net assets of Bailey Corp at that time reveals the following:
Book value of net assets: $2,150,000
Buildings undervaluation: $250,000
Buildings remaining useful life: 20 years
Net income in 2019 is $650,000 and dividends declared and paid on December 31, 2019 total
$50,000. The market value of Bailey’s shares on December 31, 2019 is $252.50 per share.
Required
Assuming Donavan continues to use the equity method to account for its investment in Bailey,
prepare the necessary journal entries for the year 2019.
Donavan Corp. – Revisited (b)
On July 1, 2020, Donavan Corporation purchases an additional 3,000 shares of Bailey
Corporation for $305.00 each. At this time, the book value of all assets and liabilities acquired
approximate their fair values, with the exception of a piece of equipment, which is undervalued
by $10,000. The equipment’s remaining useful life is estimated to be 5 years. During 2020,
Bailey Corp. reported net income of $550,000 and again paid dividends of $50,000.
Required
Assuming Donavan continues to use the equity method to account for its investment in Bailey,
prepare the necessary journal entries for the year 2020.