On January 1, Year 1, Head Ltd. purchased 50,000 common shares, representing 40% of the outstanding shares, of Toe Ltd. for $800,000. The assets of Toe included a building with a market value $300,000 greater than book value. The building had a remaining useful life of 10 years.

During Year 1, Toe had a net income of $200,000 and paid dividends of $80,000. During Year 1, Head sold Toe merchandise for $240,000 at a gross profit rate of 40%. At year end, 50% of this merchandise remained in Toe’s inventory. Head’s tax rate is 30%.

During Year 2, Toe had a net income of $240,000 and paid dividends of $140,000. At year end, the market price of the shares was $18.

1. a) Provide all the necessary Year 1 journal entries for Head Ltd. from purchase to all year-end adjustments, assuming they have significant influence.

2. b) Show all calculations necessary to determine the end of Year 2 balance in Head’s “Investment in Toe” account. Use a table format with one line per item and label each item. Provide the ending balance.

Answer rating: 100% (QA)

A Investment in Toe Ltd January 1 Year 1 Head Ltd purchases 50000 common shares representing 40 of the outstanding shares of Toe Ltd for 800000 To rec... View the full answer