Question

In: Accounting

On January 1, 2020, Ridge Road Company acquired 20 percent of the voting shares of Sauk...

On January 1, 2020, Ridge Road Company acquired 20 percent of the voting shares of Sauk Trail, Inc., for $3,100,000 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 $ 130,000 $ 130,000
Computing equipment 5,180,000 6,020,000
Patented technology 120,000 4,040,000
Trademark 170,000 2,040,000
Liabilities (205,000 ) (205,000 )

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 four-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 $ 1,840,000 $ 170,000
2021 2,025,000 180,000
  1. How much of Ridge Road’s $3,100,000 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?

Solutions

Expert Solution

Answer to the above question is given below:

   ( in $)

Particulars Amount Amount
A. Acquisition Price 3,100,000
Book Value Acquired (130,000+5,180,000+120,000+170,000-205,000)*20% 1,079,000
Excess Payment 2,021,000
Excess Fair Value: Computing Equipment (6,020,000-5,180,000)*20% 168,000
Excess Fair value: Patented Technology (4,040,000-120,000)*20% 784,000
Excess Fair value: Trademark (2,040,000-170,000)*20% 374,000 1,326,000
Goodwill 695,000
Amortization:
Computing Equipment (168,000/7) 24,000
Add: Patented Technology (784,000/4) 196,000
Annual Amortization 220,000
B. Basic Equity Accrual for 2020 (1,840,000*20%) 368,000
Less: Ammortization   220,000
Equity in 2020 Earnings of Sauk Trail 148,000
Basic Equity Accrual for 2021 (2,025,000*20%) 405,000
Less: Ammortization   220,000
Equity in 2021 Earnings of Sauk Trail 185,000
C. Acquisition Price 3,100,000
Add: Equity in 2020 Earning of Sauk Trail 148,000
Less: Dividend for 2020 (170,000*20%) 34,000
Investment in Sauk Trail as on Dec 31st 2020 3,214,000
Investment in Sauk Trail as on Dec 31st 2020 3,214,000
Add: Equity in 2021 Earnings of Sauk Trial 185,000
Less: Dividends for 2021 (180,000*20%) 36,000
Investment in Sauk Trial as on Dec 31st 2021 3,363,000

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