In 2018, Babcock Industries, a calendar year corporation, acquired a 10% interest in Caraway, Inc. for $65,000. Babcock appropriately used the fair value method to account for the investment. At the beginning of 2021, Babcock acquired an additional 25% of the outstanding common stock of Caraway for $250,000. The following additional information is available at the date of purchase related to Caraways activity for the years 2018-2020:

Cumulative dividends paid by Caraway $150,000

Cumulative income reported by Caraway $400,000

Cumulative fair value adjustment in Babcocks balance sheet $ 35,000

Caraways balance sheet on the date of the additional purchase is as follows:

Accounts receivable $100,000 Mortgage payable $200,000

Inventories 200,000

Building 400,000 Stockholders equity 500,000

Total assets $700,000 Total liabilities and equity $700,000

Babcock based its price for the additional 25% investment on the fact that Caraway has a patent that Babcock estimates is worth $500,000. The patent will expire in 10 years.

Subsequent to the investment, Caraway reports earnings of $200,000 and pays $90,000 in dividends. In addition, Babcock sells inventories to Caraway that cost $50,000 for a sales price of $80,000. At the end of 2021, 60% of the inventories are still held by Caraway.

REQUIRED:

I. Prepare a fair value allocation schedule for Babcocks 35% interest in Caraway.