On June 1, 2022, Madison Corporation purchased 100,000 shares of Steller, Inc., common stock for $2,000,000. The
Question:
On June 1, 2022, Madison Corporation purchased 100,000 shares of Steller, Inc., common stock for $2,000,000. The investment represents a 20% interest in the net assets of Steller.
On October 30, 2022, Madison received dividends of $0.50 per share on the Steller investment. Steller reported net income of $500,000 for the year ended December 31, 2022. The market value of the Steller stock was $28 per share on December 31, 2022.
On June 1, 2022, the book value of Steller's net assets was $7,000,000. The fair value of Steller's depreciable assets, with an average remaining useful life of ten years, exceeded their book value by $200,000. Steller depreciates its assets by the straight-line method. The remainder of the excess of the cost of the investment over the book value of net assets purchased was attributable to goodwill.
a) Prepare all appropriate journal entries related to the investment during 2022, assuming the 20% interest does gives Madison the ability to exercise significant influence over Steller’s operations.
b) Prepare all appropriate journal entries related to the investment during 2022, assuming the 20% interest does not give Madison the ability to exercise significant influence over Steller’s operations.