On January 1, 2006, Big company pays $70,000 for a 10% interest in Little Company. On that date, Little has a book value of $600,000, although equipment which has a five -years life, undervalued by $100,000 on the books. Little company stock is closely held by a few investors and it is traded only infrequently. Because fair values are not readily available on a continuing basis, the investment is appropriately maintained at cost.

On January 1, 2007, Big Company acquires additional 30 percent of Little Company for $264,000. This second purchase provides Big the ability to exert significant influence over Little. At the time of this transaction, little's equipment with a four-year life was undervalued by only $80,000.

During these two year, Little reported the following operational results:

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YearNet IncomeCash dividend paid

2006$210,000$110,000

2007250,000100,00

Additional information:

Cash dividend are always paid on July 1 of each year

Any goodwill is considered to have an indefinite life.

Required:

1.What amount did Big originally report for 2006 in connection with this investment.

2.On comparative financial statements for 2006 and 2007, what figures should Big report in connection with this investment.

3.What is the excess payment identified with specific asset? Present your calculation.

4.What account will you use to account for the purchase? Present your solution

5.What is the amortization expense associated with undervalued asset? Present calculation

Part B (This problem is a continuation of Part A above)

In 2008, Little reports $400,000 in income from continuing operations plus a

$60,000 extraordinary gain. The company pays a $120,000 cash dividend. During

this fiscal year, Big sells inventory costing $80,000 to Little for $100,000. Little

continues to hold 30 percent of the merchandise at the end of 2008. Big

maintains 40 percent ownership of Little throughout this period.

Required:

Prepare the journal entries for Big for the year of 2008.