Problem 1-
On January 1, 2014, Ridge Road Company acquired 25 percent of the voting shares of Sauk Trail, Inc. for $3,900,000 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, 2014, carrying amounts and corresponding fair values for Sauk Trail's assets and liabilities follow:
|
|
Carrying
Amount
|
Fair Value
|
|
Cash and receivables
|
$170,000
|
$170,000
|
|
Computing equipment
|
5,540,000
|
6,660,000
|
|
Patented technology
|
160,000
|
4,120,000
|
|
Trademark
|
210,000
|
2,120,000
|
|
Liabilities
|
(245,000)
|
(245,000)
|
Also as of January 1, 2014, Sauk Trail's computing equipment had a remaining estimated useful life of seven years. The patented technology was estimated to have a three 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:
Net Income Dividends Declared
2014 $1,920,000 $210,000
2015 2,105,000 220,000
a. How much of Ridge Road's $3,900,000 payment for Sauk Trail is attributable to goodwill?
b. What amount should Ridge Road report for its equity in Sauk Trail's earnings on its income statements for 2014 and 2015?
c. What amount should Ridge Road report for its investment in Sauk Trail on its balance sheets at the end of 2014 and 2015?
Problem 2-
Austin, Inc , acquired 10 percent of McKenzie Corporation on January 1, 2014, for $297,400 although McKenzie's book value on that date was $2,380,000. McKenzie held land that was undervalued by $144,000 on its accounting records During 2014, McKenzie earned a net income of $326,000 while declaring and paying cash dividends of $122,000 On January 1, 2015, Austin purchased an additional 30 percent of McKenzie for $840,510.
McKenzie's land is still undervalued on that date, but then by $172,700. Any additional excess cost was attributable to a trademark with a 10-year life for the first purchase and a 9-year life for the second. The initial 10 percent investment had been maintained at cost because fair values were not readily available. The equity method will now be applied. During 2015, McKenzie reported income of $407,500 and declared and paid dividends of $153,000.
Prepare all of the 2015 journal entries for Austin.
Problem 3-
On January 1, 2013, Pierce, Inc , purchased 19,000 shares of Marion Company for $608,000, giving Pierce 10 percent ownership of Marion. On January 1, 2014, Pierce purchased an additional 38.000 shares (20 percent) for $1,387,000, This latest purchase gave Pierce the ability to apply significant influence over Marion. The original 10 percent investment was categorized as an available-for-sale security. Any excess of cost over book value acquired for either investment was attributed solely to goodwill.
Marion reports net income and dividends as follows. These amounts are assumed to have occurred evenly throughout these years. Dividends are declared and paid in the same period.
| |
Net Income |
Cash Dividends(paid quarterly) |
|
2013
|
$369,000
|
$122,000
|
|
2014
|
561,000
|
146,500
|
|
2015
|
620,000
|
168,000
|
On July 1, 2015, Pierce sells 3,800 shares of this investment for $54 per share, thus reducing its interest from 30 to 28 percent. However, the company retains the ability to significantly influence Marion. Using the equity method, what amounts appear in Pierce's 2015 income statement?
As total income accrual (no unearned gains)
As on sale of shares
Problem 4-
Matthew owns 30 percent of the outstanding stock of Lindman and has the ability to significantly influence the investee's operations and decision making. On January 1, 2015, the balance in the Investment in Lindman account is $345,000. Amortization associated with this acquisition is $17,000 per year In 2015, Lindman earns an income of $208,000 and declares cash dividends of $52,000 Previously, in 2014, Lindman had sold inventory costing $51,100 to Matthew for $73,000. Matthew consumed all but 20 percent of this merchandise during 2014 and used the rest during 2015. Lindman sold additional inventory costing $59,400 to Matthew for $90,000 in 2015. Matthew did not consume 40 percent of these 2015 purchases from Lindman until 2016.
a. What amount of equity method income would Matthew recognize in 2015 from its ownership interest in Lindman?
b. What is the equity method balance in the Investment in Lindman account at the end of 2015?