X Ltd and Y Ltd

Essay

X Ltd. and Y Ltd. formed a joint venture on joint venture called XY Inc. on January 1, 2020. X Ltd. Invested contributed equipment with a book value of $600,000 and a fair value of $2,100,000 for a 50% interest in the joint venture. On December 31, 2020, XY Inc. reported a net income of $612,000. The equipment transferred has an estimated useful life of 20 years. Ignore taxes.
Assume the transaction does not have commercial substance because X Ltd. owned a similar portion of the same type of equipment both before and after the contribution to the joint venture.
Calculate the gain on the contribution of equipment and prepare the journal entries to record the events on January 1 and December 31, 2020. Also calculate under the equity method X Ltd.'s share of net income and the amount it will recognize.
$\begin{array}{|l|r|}\hline \text { Fair value of equipment transferred to XY Inc. } & \$ 2,100,000 \\\hline \text { Carrying value of the equipment on X's books } & \$ 600,000 \\\hline \text { Unrealized gain on the transfer to XY Inc.: } & \\\hline \text { Contra account to be netted against investment account } &\$ 1,500,000 \\\hline\end{array}$