In: Accounting
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 | ||||
How much of Ridge Road’s $3,100,000 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?
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 |