Question

On January 2, 2021, Barley Corp. purchased 40% of the voting common stock of Wheat Co., paying $3,000,000. Barley properly accounts for this investment using the equity method. At the time of the investment, Wheat’s total stockholders’ equity was $5,000,000. Barley gathered the following information about Wheat’s assets and liabilities whose book values and fair values differed:

	Book Value				Fair Value
Buildings (20-year life)	$	1,000,000			$	1,800,000
Equipment (5-year life)		1,500,000				2,000,000
Franchises (10-year life)		0				700,000

Any excess of cost over fair value was attributed to goodwill, which has not been impaired. Wheat Co. reported net income of $400,000 for 2021, and paid dividends of $200,000 during that year.

How much goodwill is associated with this investment?

Answer 1

All amounts are in $

Barley Corp. purchased 40% of shares in Wheat Co. paying $3,000,000

Under equity method, no goodwill is separately recognised. It will be inside the consideration and accounted as single investment asset.

Goodwill component will be consideration paid in excess of fair value of assets.

Fair value of business

= Existing Stockholders Equity + Excess of fair value over book value

= 5,000,000 + (1,800,000+2,000,000+700,000-1,000,000-1,500,000)

= 7,000,000

Share in fair value = 40% x 7,000,000 = 2,800,000

Consideration paid = $3,000,000

Goodwill = $200,000

This goodwill will form part of "Equity investment" account and will not be separately accounted in books. Under Equity method, goodwill balance will be "0" but this "$200,000" is a component in Equity investment.

Note :

Only Goodwill component is asked and no Investment balance is asked.

If required, Investment balance at year end will be $3,200,000