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Advanced Chapters 1-3

Terms in this set (24)

On January 1, 2017, Ridge Road Company acquired 20 percent of the voting shares of Sauk Trail, Inc., for $3,100,000 in cash. Both companies provide commercial Internet support services but serve markets in different industries. Ridge Road made the investment to gain access to Sauk Trail's board of directors and thus facilitate future cooperative agreements between the two firms. Ridge Road quickly obtained several seats on Sauk Trail's board which gave it the ability to significantly influence Sauk Trail's operating and investing activities.

The January 1, 2017, carrying amounts and corresponding fair values for Sauk Trail's assets and liabilities follow:
Cash and receivables $130,000 $130,000
Computing equipment 5,180,000 6,020,000
Patented technology 120,000 4,040,000
Trademark 170,000 2,040,000
Liabilities (205,000) (205,000)

Also as of January 1, 2017, Sauk Trail's computing equipment had a seven-year remaining estimated useful life. The patented technology was estimated to have a four-year remaining useful life. The trademark's useful life was considered indefinite. Ridge Road attributed to goodwill any unidentified excess cost.

During the next two years, Sauk Trail reported the following net income and dividends:

2017 $ 1,840,000 $ 170,000
2018 2,025,000 180,000

How much of Ridge Road's $3,100,000 payment for Sauk Trail is attributable to goodwill?
What amount should Ridge Road report for its equity in Sauk Trail's earnings on its income statements for 2017 and 2018?
What amount should Ridge Road report for its investment in Sauk Trail on its balance sheets at the end of 2017 and 2018?
Haynes, Inc., obtained 100 percent of Turner Company's common stock on January 1, 2017, by issuing 8,500 shares of $10 par value common stock. Haynes's shares had a $15 per share fair value. On that date, Turner reported a net book value of $88,750. However, its equipment (with a five-year remaining life) was undervalued by $7,250 in the company's accounting records. Also, Turner had developed a customer list with an assessed value of $31,500, although no value had been recorded on Turner's books. The customer list had an estimated remaining useful life of 10 years.

The following balances come from the individual accounting records of these two companies as of December 31, 2017
Revenues $ (692,000 ) $ (275,000 )
Expenses 449,000 130,000
Investment income Not given 0
Dividends declared 120,000 70,000

The following balances come from the individual accounting records of these two companies as of December 31, 2018:

Haynes Turner
Revenues $ (886,000 ) $ (348,750 )
Expenses 471,200 163,100
Investment income Not given 0
Dividends declared 140,000 50,000
Equipment 532,000 373,000

a. What balance does Haynes's Investment in Turner account show on December 31, 2018, when the equity method is applied?
b. What is the consolidated net income for the year ending December 31, 2018?
c-1. What is the consolidated equipment balance as of December 31, 2018?
c-2. Would this answer be affected by the investment method applied by the parent?
d. Prepare entry *C for the beginning of the Retained Earnings account on a December 31, 2018 by using initial value, partial equity and equity method.

An allocation of the acquisition price (based on the fair value of the shares issued) must be made first.

Acquisition fair value (consideration paid by Haynes) $127,500
Book value equivalency (88,750)
Excess of Turner fair value over book value $38,750
Excess fair value assigned to specific accounts based on fair value Life Annual Excess Amortizations
Equipment $ 7,250 5 yrs. $ 1,450
Customer List 31,500 10 yrs. 3,150
$ 4,600

Acquisition fair value $ 127,500
2017 Income accrual 145,000
2017 Dividends declared by Turner (70,000)
2017 Amortizations (above) (4,600)
2018 Income accrual 185,650
2018 Dividends declared by Turner (50,000)
2018 Amortizations (4,600)
Investment in Turner account balance $ 328,950


Net income of Haynes $ 414,800
Net Income of Turner 185,650
Depreciation expense (1,450 )
Amortization expense (3,150 )
Consolidated net income 2018 $ 595,850


Equipment balance Haynes $ 532,000
Equipment balance Turner 373,000
Allocation based on fair value (above) 7,250
Depreciation for 2017-2018 (2,900 )
Consolidated equipment December 31, 2018 $ 909,350


If the initial value method was applied during 2017, the parent would have recorded dividend income of $70,000 rather than $145,000 (as equity income). Income is, therefore, understated by $75,000. In addition, amortization expense of $4,600 was not recorded. Thus, the January 1, 2018, retained earnings is understated by $70,400 ($75,000 - $4,600). Worksheet Entry *C thus serves to adjust the parent's beginning retained earning to a full accrual basis.

If the partial equity method was applied during 2017, the parent would have failed to record amortization expense of $4,600. Retained earnings are overstated by $4,600 and are corrected through Entry *C.

If the equity method was applied during 2017, consolidated retained earnings would equal the parent's retained earnings. Thus, no adjustment would be necessary.
Under the acquisition method, the shares issued by Wisconsin are recorded at fair value using the following journal entry:

General Journal Debit Credit
Investment in Badger (value of debt and shares issued) 1,026,700
cr Common stock (par value)
cr Additional paid-in capital (excess over par value) 624,000
Liabilities 194,700

The payment to the broker is accounted for as an expense. The stock issue cost is a reduction in additional paid-in capital.

General Journal Debit Credit
Professional services expense 38,200
Additional paid-in capital 46,100
Cash 84,300

Allocation of acquisition-date excess fair value:

Consideration transferred (fair value) for Badger Stock $ 1,026,700
Book value of Badger, 6/30 830,000
Fair value in excess of Book value $ 196,700
Excess fair value (undervalued equipment) 151,500
Excess fair value (overvalued patented technology) (24,000)
Goodwill $ 69,200


Net income (adjusted for professional services expense. The figures earned by the subsidiary prior to the takeover are not included) = $217,800.
Retained earnings, 1/1 (the figures earned by the subsidiary prior to the takeover are not included) = $838,000.
Patented technology (the parent's book value plus the fair value of the subsidiary) = $1,318,000.
Goodwill (computed above) = $69,200.
Liabilities (the parent's book value plus the fair value of the subsidiary's debt plus the debt issued by the parent in acquiring the subsidiary) = $1,204,700.
Common stock (the parent's book value after recording the newly-issued shares) = $568,000.
Additional paid-in capital (the parent's book value after recording the two entries above) = $847,900.