Question

On January 1, 2020, Ridge Road Company acquired 25 percent of the voting shares of Sauk Trail, Inc., for $3,800,000 in cash. Both companies provide commercial Internet support services but serve markets in different industries. Ridge Road made the investment to gain access to Sauk Trail’s board of directors and thus facilitate future cooperative agreements between the two firms. Ridge Road quickly obtained several seats on Sauk Trail’s board, which gave it the ability to significantly influence Sauk Trail’s operating and investing activities.

The January 1, 2020, carrying amounts and corresponding fair values for Sauk Trail’s assets and liabilities follow:

	Carrying Amount			Fair Value
Cash and receivables	$	165,000		$	165,000
Computing equipment		5,495,000			6,580,000
Patented technology		155,000			4,110,000
Trademark		205,000			2,110,000
Liabilities		(240,000	)		(240,000	)

Also, as of January 1, 2020, Sauk Trail’s computing equipment had a seven-year remaining estimated useful life. The patented technology was estimated to have a five-year remaining useful life. The trademark's useful life was considered indefinite. Ridge Road attributed to goodwill any unidentified excess cost.

During the next two years, Sauk Trail reported the following net income and dividends:

	Net Income		Dividends Declared
2020	$	1,910,000	$	205,000
2021		2,095,000		215,000

1. How much of Ridge Road’s $3,800,000 payment for Sauk Trail is attributable to goodwill?

2. What amount should Ridge Road report for its equity in Sauk Trail’s earnings on its income statements for 2020 and 2021?

3. What amount should Ridge Road report for its investment in Sauk Trail on its balance sheets at the end of 2020 and 2021?

Answer 1

Answer :

(a) Computation of amount of goodwill

Consideration paid		$ 3800000
Less - Fair value of assets acquired
Cash and receiviable	$ 165000
Computing equipment	$ 6580000
Patented technoogy	$ 4110000
Trademark	$ 2110000
Liabilities	$( 240000)
	$ 12725000
Share of Ridge road $ 12725000*25%		$ (3181250)
Goodwill		$ 618750

(b)

Computation of  amount Ridge Road report for its equity in Sauk Trail’s earnings on its income statements for 2020 and 2021

	2020
Share of earning $ 1910000* 25 %	$ 477500
Less - Amortisation cost	$ 236500
Equity in 2020 earning of Sauk trail inc	$ 241000

	2021
Share of earning $ 2095000* 25 %	$ 523750
Less - Amortisation cost	$ 236500
Equity in 2020 earning of Sauk trail inc	$ 287250

Working note - 1

Computation of amortisation cost per year

	Carrying amount (a)	Fair value (b)	Excess fair value (c) = (b) - (a)	Ridge road share (c) *25 %	Amortisation cost yearly
Computing equipment	$ 5495000	$ 6580000	$ 1085000	$ 271250	$ 271250/ 7 = $ 38750
Patented technology	$ 155000	$ 4110000	$ 3955000	$ 988750	$ 988750/ 5 = $ 197750
Trademark	$ 205000	$ 2110000	$ 1905000	$ 476250	-
				Total	$ 236500

(c)

	2020
Acquisition price	$ 3800000
Equity in 2020 earning	$ 241000
Dividend $ 205000*25 %	$ 51250
Investment in Sauk trail inc at the end of year on balance sheet	$ 3989750

	2021
Acquisition price	$ 3989750
Equity in 2021 earning	$ 287250
Dividend $ 215000*25 %	$ (53750)
Investment in Sauk trail inc at the end of year on balance sheet	$ 4223250