Question

Goyard Corp, a privately-owned company, has 31 December year-end. The company has elected to apply ASPE for its financial reporting. On January 1, 2016, Goyard Corp bought 3,000 of the 10,000 outstanding common shares of Investee Inc. for $65,000. Coyard Corp has significant influence. On this date, Investee Inc. had assets and liabilities as follows:

As of January 1, 2016
	Book Value	Fair Value
Assets not subject to depreciation	$            54,000	$            65,000
Assets subject to depreciation (net)	280,500	308,500
Liabilities	180,500	180,500

The difference between book value and fair value were related to land and to equipment (which is estimated to have remaining 5-years of useful life and is depreciated using straight-line method).

At the fiscal year end December 31, 2016, Investee Inc. reported net Income of $50,000, and declared and paid total common dividends of $30,000. Goodwill was not impaired in 2016.

1. How much goodwill is inherent in the purchase price?
2. Give any required entries for Investor Limited’s books for the above events assuming that the equity method is used.
3. Other than Equity Method, what other method is permitted under ASPE?

Answer 1

Step 1

Goodwill is the intangible asset which is held by one company upon the acquisition or the purchase of another company. It is the value of assets which is excess of the fair value of the assets acquired based upon its book value. It is the asset which helps to generate further revenue after the purchase or acquisition.

Step 2

1. The goodwill inherent in the purchase price is computed as follows:

Particulars	Fair value	Book Value	Goodwill
Assets	$65,000	$54,000	$11,000
Assets (subject to depreciation)	$308,500	$280,500	$28,000
Liabilities	$180,500	$180,500	$0
Total Goodwill			$39,000

1. The entries as per equity method is as follows:

Particulars		Amount	Amount
Equity method investment		$65,000
Cash			$65,000
(To record initial investment)
Equity method investment		$50,000
Equity method income			$50,000
(To record net income for the period)
Equity method investment		$30,000
Cash			$30,000
(To record payment of dividend)

1. Other than equity method the cost method can be adopted under ASPE for the purpose of accounting of investment.