Franklin purchases 40 percent of Johnson Company on January 1 for $649,400. Although Franklin did not use it, this acquisition gave Franklin the ability to apply significant influence to Johnsons operating and financing policies. Johnson reports assets on that date of $1,557,000 with liabilities of $594,000. One building with a seven year life is undervalued on Johnsons books by $238,000. Also, Johnsons book value for its trademark (10-year life) is undervalued by $422,500. During the year, Johnson reports net income of $92,000 while declaring dividends of $30,000. What is the Investment in Johnson Company balance (equity method) in Franklins financial records as of December 31?

$680,500.

$643,700.

$657,300.

$674,200.

Starting from year 2010, Gaw Company owns 15% of the common stock of Trace Corporation and used the fair-value method to account for this investment. Trace reported net income of $110,000 for 2011 and paid dividends of $80,000 on October 1, 2011. The fair value of Traces stock has not been changed during 2011. How much income from this investment should Gaw included in its Income Statement for year 2011?

$16,500

$80,000

$50,000

$12,000

On January 1, 2014, Ridge Road Company acquired 25 percent of the voting shares of Sauk Trail, Inc. for $3,600,000 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 Trails board of directors and thus facilitate future cooperative agreements between the two firms. Ridge Road quickly obtained several seats on Sauk Trails board which gave it the ability to significantly influence Sauk Trails operating and investing activities.

The January 1, 2014, carrying amounts and corresponding fair values for Sauk Trails assets and liabilities follow:

	Carrying Amount			Fair Value
Cash and receivables	$	155,000		$	155,000
Computing equipment		5,405,000			6,420,000
Patented technology		145,000			4,090,000
Trademark		195,000			2,090,000
Liabilities		(230,000	)		(230,000	)
Also as of January 1, 2014, Sauk Trails 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 trademarks 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	$	1,890,000		$	195,000
2015		2,075,000			205,000

a.	How much of Ridge Roads $3,600,000 payment for Sauk Trail is attributable to goodwill?

b.	What amount should Ridge Road report for its equity in Sauk Trails 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?

On January 1, 2014, Alison, Inc., paid $91,200 for a 40 percent interest in Holister Corporations common stock. This investee had assets with a book value of $268,500 and liabilities of $98,500. A patent held by Holister having a $9,500 book value was actually worth $36,500. This patent had a six-year remaining life. Any further excess cost associated with this acquisition was attributed to goodwill. During 2014, Holister earned income of $42,200 and declared and paid dividends of $14,000. In 2015, it had income of $62,750 and dividends of $19,000. During 2015, the fair value of Allisons investment in Holister had risen from $104,280 to $108,880.

a.	Assuming Alison uses the equity method, what balance should appear in the Investment in Holister account as of December 31, 2015?

b.	Assuming Alison uses fair-value accounting, what income from the investment in Holister should be reported for 2015?

Austin, Inc., acquired 40 percent of McKenzie Corporation on January 1, 2014, for $1,253,600 although McKenzies book value on that date was $2,690,000. McKenzie held land that was undervalued by $189,000 on its accounting records. Any additional excess cost was attributable to goodwill. The equity method will be applied. During 2015, McKenzie reported income of $368,250 and declared and paid dividends of $138,000.

Austin, Inc., acquired 10 percent of McKenzie Corporation on January 1, 2014 for $313,400. During 2014, McKenzie earned a net income of $287,000 while declaring and paying cash dividends of $108,000. On January 1, 2015, Austin purchased an additional 30 percent of McKenzie for $932,700. The initial 10 percent investment had been maintained at fair value, and the fair value of McKenzie on January 1, 2015 is implied by the second purchase. The equity method will now be applied. During 2015, McKenzie reported income of $368,250 and declared and paid dividends of $138,000.

Write the Journal entries that Austin needs to make during year 2015. Note that Austin needs to (1) switch from Fair Value Method to Equity Method on 1/1/2015, and (2) carry the investment in McKenzie in Equity Method afterwards

purchase additional 30% of McKenzie's stock

2

Convert Available-for-sale Securities into Investment in McKenzie Corporpation

3

Adjust the investment account to reflect the investee's equity

4

Eliminate the unrealized holding gain under Fair Value Method.

5

Recognize McKenzie's Net Income during 2015.

6

Record McKenzie's Dividend paid in 2015

7

Description

Required: Please show the allocation of excess payment over the book value, and derive the goodwill associated with this equity investment. Total McKenzie Corporation Austin Corporation's 40% interest 2Implied fair value 3 Book value 4 Excess payment 5 6 Allocation of excess payment: 7 Undervalued land 8 Goodwill 10