Question
In: Accounting
On January 1, 2020, Ridge Road Company acquired 25 percent of the voting shares of Sauk...
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 | ||||
-
How much of Ridge Road’s $3,800,000 payment for Sauk Trail is attributable to goodwill?
-
What amount should Ridge Road report for its equity in Sauk Trail’s earnings on its income statements for 2020 and 2021?
-
What amount should Ridge Road report for its investment in Sauk Trail on its balance sheets at the end of 2020 and 2021?
Solutions
Expert Solution
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 |
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