On January 1, 20X0, Hunter Corporation issued 8,000 of its $15 par value shares to acquire 45 percent of the shares of Arrow Manufacturing. Arrow Manufacturing's balance sheet immediately before the acquisition contained the following items: ARROW MANUFACTURING
Balance Sheet
January 1, 20X0
Book Value Fair Value
Assets
Cash and Receivables $36,000 $36,000
Land 70,000 80,000
Buildings & Equipment (net) 126,000 156,000
Patent 80,000 80,000
Total Assets 312,000
Liabilities & Equities
Accounts Payable $126,000 126,000
Common Stock 138,000
Retained Earnings 48,000
Total Liabilities & Equities $312,000
On the date of the stock acquisition, Hunter's shares were selling at $40, and Arrow Manufacturing's buildings and equipment had a remaining economic life of 5 years. The amount of the differential assigned to goodwill is not impaired.
In the two years following the stock acquisition, Arrow Manufacturing reported net income of $85,000 and $55,000 and paid dividends of $27,000 and $45,000, respectively. Hunter used the equity method in accounting for its ownership of Arrow Manufacturing.
a. Prepare the entry recorded by Hunter Corporation at the time of acquisition.
b-1. Prepare the journal entries recorded by Hunter during 20X0 related to its investment in Arrow Manufacturing.
b-2. Prepare the journal entries recorded by Hunter during 20X1 related to its investment in Arrow Manufacturing.
c. What balance will be reported in Hunter’s investment account on December 31, 20X1?

a. Entry recorded by Hunter Corporation at the time of acquisition.

DR Investment in Arrow Manufacturing (8,000 * $40)$320,000  

  CR  Common Stock (8,000 * 15)  $120,000  

   CR Additional Paid-In Capital  $200,000  

(To record acquisition of Arrow Manufacturing stock)

b-1. Journal entries recorded by Hunter during 20X0 related to its investment in Arrow Manufacturing.

DR Investment in Arrow Manufacturing (8,000 * $40)$320,000  

  CR  Common Stock (8,000 * 15)  $120,000  

   CR Additional Paid-In Capital  $200,000

DR Cash (27,000 * 45%)$12,150  

  CR Investment in Arrow Manufacturing Stock  $12,150  

(To record dividends from Arrow Manufacturing)

DR Investment in Arrow Manufacturing Stock ( $85,000 x 0.45)$38,250‬  

 CR  Income from Arrow Manufacturing  $38,250‬  

(To record equity income from Arrow Manufacturing)

DR Income from Arrow Manufacturing$2,700

  CR Investment in Arrow Manufacturing Stock  $2,700  

(To amortize differential assigned to buildings and equipment)

Working

Investment in Arrow Stock

(156,000 -126,000)*0.45) / 5 years remaining economic life.

b-2. The journal entries recorded by Hunter during 20X1 related to its investment in Arrow Manufacturing.

DR Cash (45,000 * 45%)$20,250  

  CR Investment in Arrow Manufacturing Stock  $20,250  

(To record dividends from Arrow Manufacturing)

DR Investment in Arrow Manufacturing Stock ( $55,000 x 0.45)$24,750‬  

 CR  Income from Arrow Manufacturing  $24,750‬  

(To record equity income from Arrow Manufacturing)

DR Income from Arrow Manufacturing$2,700

  CR Investment in Arrow Manufacturing Stock  $2,700  

(To amortize differential assigned to buildings and equipment)

c.

Purchase price on January 1, 20X0  $320,000

20X0: Income from Arrow Manufacturing    

(38,250‬ - 2,700)$35,550  

Less: Dividends received-12,150

Investment account balance, December 31, 20X0      $343,400‬

20X1: Income from Arrow Manufacturing    

($24,750‬  - $2,700)$22,050  

Dividends received-20,250  

Investment account balance, December 31, 20X1  $345,200‬

yes the correct answer was

b.the increased supply will create a surplus.    

answer; the correct answer is (enforcement of regulations;