On January 1, 2018, Jungle Company pays $90,000 for a 10 percent interest in City Company. On that date, City has a book value of $800,000, although equipment which has a five-year life is undervalued by $100,000 on the books. City Company’s stock is closely held by a few investors and it is traded only infrequently. Because fair values are not readily available on a continuing basis, the investment is appropriately maintained at cost.

On January 1, 2019, Jungle Company acquires additional 30 percent of City Company for$324,000. This second purchase provides Jungle the ability to exert significant influence over City. At the time of this transaction, City's equipment with a four-year life was undervalued by only $80,000. During these two years, City reported the following operational results: Y

ear Net Income Cash dividend paid 2018 $240,000 $140,000 2019 300,000 150,000 Additional information: * Cash dividend is always paid on July 1 of each year. * Any goodwill is considered to have an indefinite life. Required:

1. What amount did Jungle originally report for 2018 in connection with this investment?

2. On comparative financial statements for 2018 and 2019, what figures should Jungle report in connection with this investment?

Part B (This problem is a continuation of Part A above) In 2020, City reports $500,000 in income from continuing operations plus a $80,000 extraordinary gain. The company pays a $140,000 cash dividend. During this fiscal year, Jungle sells inventory costing $100,000 to City for $125,000. City continues to hold 40 percent of the merchandise at the end of 2020. Jungle maintains 40 percent ownership of City throughout this period. Required: Prepare all journal entries for Jungle for the year of 2020.

Answer rating: 100% (QA)

1 Since Jungle has significant influence over City it should use the equity method to account for th... View the full answer