Question

On January 1, 2017, Ridge Road Company acquired 30 percent of the voting shares of Sauk Trail, Inc., for $4,700,000 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, 2017, carrying amounts and corresponding fair values for Sauk Trail's assets and liabilities follow:

	Carrying Amount			Fair Value
Cash and receivables	$	210,000		$	210,000
Computing equipment		5,900,000			7,300,000
Patented technology		200,000			4,200,000
Trademark		250,000			2,200,000
Liabilities		(285,000	)		(285,000	)

Also as of January 1, 2017, Sauk Trail's computing equipment had a seven-year remaining estimated useful life. The patented technology was estimated to have a three-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
2017	$	2,000,000	$	250,000
2018		2,185,000		260,000

How much of Ridge Road's $4,700,000 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 2017 and 2018?

What amount should Ridge Road report for its investment in Sauk Trail on its balance sheets at the end of 2017 and 2018?

Answer 1

a	Acquistion price					$4,700,000
	Book Value acquired (210000+5900000+200000+250000-285000)*30%					1882500
	Excess Payment					$2,817,500
	Excess fair value: computing equipment(7300000-5900000)*30%					420000
	Excess fair value: Patent technology(4200000-200000)*30%					1200000
	Excess fair value: trade mark(2200000-250000)*30%					585000
	Goodwill					$612,500
	Amortization :
	Computing Equipment 420000/7					60000
	Patented technology 1200000/3					400000
	Trademark					0	Since Indefinite
	Goodwill					0	Since Indefinite
	Annual amortization					460000
b	Basic Equity Accrual 2017(2000000*30%)					600000
	Amortization - 2017					-460000
	Equity in 2017 earnings of Sauk Trail					140000
	Basic Equity Accrual 2018(2185000*30%)					655500
	Amortization - 2017					-460000
	Equity in 2018 earnings of Sauk Trail					195500
c	Acquistion Price					$4,700,000
	Equity in 2017 earnings of Sauk Trail					140000
	Dividends (250000*30%)					-75000
	Investment in Sauk Trail, 2017					$4,765,000
	Investment in Sauk Trail, 2017					$4,765,000
	Equity in 2017 earnings of Sauk Trail					195500
	Dividends (260000*30%)					-78000
	Investment in Sauk Trail, 2018					$4,882,500