A summary of the 1996 balance sheet of Alsop, Ltd., follows: (The equity method versus consolidated financial statements) Assets $ 180,000 Total $ 180,000 Liabilities $ 90,000 Stockholders’ equity 90,000 Total $ 180,000 On January 1, 1996, Alsop acquired 100 percent of the outstanding common stock of Martin Monthly for $62,000 cash. At the time of the acquisition, the fair market values of the assets Chapter 8 Investments in Equity Securities 403 and liabilities of Martin were $86,000 and $64,000, respectively. During 1996 Martin operated as a subsidiary of Alsop; it recognized $15,000 of net income and paid a $10,000 dividend. REQUIRED:

a. Account for the acquisition as a purchase. Provide the journal entry to record the acquisi¬ tion, and prepare Alsop’s consolidated balance sheet as of January 1, 1996.

b. How much goodwill will Alsop amortize during 1996 if the company amortizes goodwill over forty years using the straight-line method?

c. Account for the acquisition using the equity method. Provide the journal entry to record the acquisition, and prepare Alsop’s balance sheet as of January 1, 1996.

d. Compute the debt/equity ratios produced by the two methods of accounting for this invest¬ ment. Explain why Alsop’s management might wish to use the equity method instead of preparing consolidated financial statements.