On January 1, 2017, Boss Co. pays $96,000 to acquire 30% of the voting common stock...

On January 1, 2017, Boss Co. pays $96,000 to acquire 30% of the voting common stock of People Inc. Boss uses the equity method to account for its investment. At the time of the investment, People Inc. had net assets with a book value of $240,000 and with one undervalued net asset building which is undervalued in book by $30,000 (remaining useful life 15 years on 1/1/17). During 2017, People Inc. reported a net income of $100,000 and paid dividends of $60,000. Any excess cost over book value is attributable to goodwill with an indefinite life.

1) How much is the amount of goodwill from Boss’s investment in People Inc. (1/1/2017)?

2) What is the annual amortization of FV>BV (i.e., undervalued building)?

3) What is the balance in Boss’s investment account on December 31, 2017? Show your calculation (Show journal entries).

Expert Solution

1.)		Amount $
	Purchase Consideration	96,000
	Less: Share of Net assets acquired	81,000
	{ ( 240,000 + 30,000 ) x 30% }
	Goodwill	15,000

2.)	Annual Amrotization of FV>BV	$ 2,000	=30000/15

3.)		Amount $
	Cost Of Investment	96,000
	Add: Share of net Income ( 100,000 x 30% )	30,000
	Less: Annual amortization ( 2,000 x 30% )	600
	Less: Dividend received ( 60,000 x 30% )	18,000
	Balance in Boss’s investment account on December 31, 2017	107,400

	Account Titles & Explanation	Debit $	Credit $
	Investment in People Inc.	96,000
	Cash		96,000
	( To record investment )

	Investment in People Inc.	30,000
	Investment Revenue		30,000
	( To record share of net income )

	Investment Revenue	600
	Investment in People Inc.		600
	( To record share of annual amortization )

	Cash	18,000
	Investment in People Inc.		18,000
	( To record dividend received )

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