Question

In: Accounting

On January 4, 2013, Bailey Corp. purchased 40% of the votingcommon stock of Emery Co.,...

On January 4, 2013, Bailey Corp. purchased 40% of the voting common stock of Emery Co., paying $3,000,000. Bailey properly accounts for this investment using the equity method. At the time of the investment, Emery's total stockholders' equity was $5,000,000. Bailey gathered the following information about Emery's assets and liabilities whose book values and fair values differed:

Book Value Fair Value

Buildings: (20 Year Life) 1,000,000 1,800,000

Equipment( 5 Year Life) 1,500,000 2,000,000

Franchises (10 Year Life) 0 700,000

Any excess of cost over fair value was attributed to goodwill, which has not been impaired. Emery Co. reported net income of $400,000 for 2013, and paid dividends of $200,000 during that year.

What is the amount of the excess of purchase price over book value?

Expert Solution

Calaculation of amount of excess of purchase price over book value

As per given information,

Book value of net assets

= $1000000+$1500000+$0 = $2500000

Fair value of net assets

= $1800000+$2000000+$700000 = $4500000

Here, Bailey corp. Holds 40% stock of the Emery co.. So that, bailey corp. should record only 40% of book value of net assets.That implies, For bailey

Book value of net asstes = $2500000×40% = $1000000

It was given that,

purchase price paid for 40% stock = $3000000

Therefore,

Amount of excess of purchase price over book value

= $3000000 - $1000000

= $2000000

ekkarill92 answered 2 years ago

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