Question

Franklin purchases 40 percent of Johnson Company on January 1 for $604,600. Although Franklin did not use it, this acquisition gave Franklin the ability to apply significant influence to Johnson’s operating and financing policies. Johnson reports assets on that date of $1,518,000 with liabilities of $598,000. One building with a seven-year remaining life life is undervalued on Johnson’s books by $311,500. Also, Johnson’s book value for its trademark (10-year life) is undervalued by $280,000. During the year, Johnson reports net income of $112,000 while declaring dividends of $50,000. What is the Investment in Johnson Company balance (equity method) in Franklin’s financial records as of December 31?

a. $618,200.

b. $600,400.

c. $629,400.

d. $645,200.

Answer 1

Solution

Calculation of the value of investment under equity method as shown below:

Investment Made	$604,600
Add: Share of net income ($112,000 x40%)	$44800
Less:
Share of Dividend ($50,000x40%)	($20000)
Depreciation of building (Note 1)	($17800)
Amortization of trademark (note 2)	($11200)
Investment to be reported as 31st december	$ 600400

Therefore the financial record of F should show the investment at a value of as on 31st december.

Working notes

1.

Calculte the depreciation on building as shown below

Share of depreciation= ($311,500/ 7 Years) x 40%

= 44500 x 40%

= $17800

the share of depreciation on building to be deducted from investment is $17800

2.

Calculate the share of amortization of trademark to be deducted as shown below:

Trademark amortiozation = ($280,000 / 10 years) x 40%

= 28000 x 40%

= $11200

The share of amortization of trademark to be deducted from investment is $11200.

Hence the correct option is B. i.e. $600400