Question

On January 1, 2020, Ridge Road Company acquired 25 percent of the voting shares of Sauk Trail, Inc., for $4,000,000 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 $ 175,000 $ 175,000 Computing equipment 5,585,000 6,740,000 Patented technology 165,000 4,130,000 Trademark 215,000 2,130,000 Liabilities (250,000 ) (250,000 ) 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 five-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 $ 1,930,000 $ 215,000 2021 2,115,000 225,000 How much of Ridge Road’s $4,000,000 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? On January 1, 2020, Ridge Road Company acquired 25 percent of the voting shares of Sauk Trail, Inc., for $4,000,000 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 $ 175,000 $ 175,000 Computing equipment 5,585,000 6,740,000 Patented technology 165,000 4,130,000 Trademark 215,000 2,130,000 Liabilities (250,000 ) (250,000 ) 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 five-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 $ 1,930,000 $ 215,000 2021 2,115,000 225,000 How much of Ridge Road’s $4,000,000 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? On January 1, 2020, Ridge Road Company acquired 25 percent of the voting shares of Sauk Trail, Inc., for $4,000,000 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 $ 175,000 $ 175,000 Computing equipment 5,585,000 6,740,000 Patented technology 165,000 4,130,000 Trademark 215,000 2,130,000 Liabilities (250,000 ) (250,000 ) 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 five-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 $ 1,930,000 $ 215,000 2021 2,115,000 225,000 How much of Ridge Road’s $4,000,000 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? On January 1, 2020, Ridge Road Company acquired 25 percent of the voting shares of Sauk Trail, Inc., for $4,000,000 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 $ 175,000 $ 175,000 Computing equipment 5,585,000 6,740,000 Patented technology 165,000 4,130,000 Trademark 215,000 2,130,000 Liabilities (250,000 ) (250,000 ) 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 five-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 $ 1,930,000 $ 215,000 2021 2,115,000 225,000 How much of Ridge Road’s $4,000,000 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? On January 1, 2020, Ridge Road Company acquired 25 percent of the voting shares of Sauk Trail, Inc., for $4,000,000 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 $ 175,000 $ 175,000 Computing equipment 5,585,000 6,740,000 Patented technology 165,000 4,130,000 Trademark 215,000 2,130,000 Liabilities (250,000 ) (250,000 ) 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 five-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 $ 1,930,000 $ 215,000 2021 2,115,000 225,000 How much of Ridge Road’s $4,000,000 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? On January 1, 2020, Ridge Road Company acquired 25 percent of the voting shares of Sauk Trail, Inc., for $4,000,000 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 $ 175,000 $ 175,000 Computing equipment 5,585,000 6,740,000 Patented technology 165,000 4,130,000 Trademark 215,000 2,130,000 Liabilities (250,000 ) (250,000 ) 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 five-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 $ 1,930,000 $ 215,000 2021 2,115,000 225,000 How much of Ridge Road’s $4,000,000 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 1

a            Acquisition price                                                          $4000000                                                                      

              Book Value acquired (175000+5850000+165000+215000-250000)*25%  1538750                                                                          

              Excess Payment                                             $2461250                                                                      

              Excess fair value: computing equipment(6740000-5585000)*25%              288750                                                            

              Excess fair value: Patent technology(4130000-165000)*25%         991250                                                            

              Excess fair value: trade mark(2130000-215000)*25%       478750                                                            

              Goodwill                                                                         $702500                                                                        

              Amortization :                                                                                                                          

              Computing Equipment 288750/7                             41250                                                              

              Patented technology 991250/5                 198250                                                             

              Trademark                                                      0            Since Indefinite                               

              Goodwill                                                                         0            Since Indefinite                              

              Annual amortization                                    239500                        

        

              

                                                                                                                                                                    

b            Basic Equity Accrual 2020(1930000*25%)                             482500                                                            

              Amortization - 2020 -239500                                                                         

              Equity in 2020 earnings of Sauk Trail                      243000                                                           

                                                                                                                                                                    

              Basic Equity Accrual 2021(2115000*25%)                             528750                                                            

              Amortization - 2020 -239500                                                                         

              Equity in 2021 earnings of Sauk Trail                      289250                                                            

                                                                                                                                                                    

c            Acquisition Price                                                          $4000000                                                                      

              Equity in 2020 earnings of Sauk Trail                      289250                                                            

              Dividends (215000*25%)                                            -53750                                                            

              Investment in Sauk Trail, 2020 $4235500                                                                      

                                                                                                                                                                    

              Investment in Sauk Trail, 2020 $4235500                                                                      

              Equity in 2020 earnings of Sauk Trail                      289250                                                            

              Dividends (225000*25%)                                            -56250                                                            

              Investment in Sauk Trail, 2021 $4468500