Question

Franklin purchases 40 percent of Johnson Company on January 1 for $601,700. Although Franklin did not use it, this acquisition gave Franklin the ability to apply significant influence to Johnson’s operating and financing policies. Johnson reports assets on that date of $1,554,000 with liabilities of $582,000. One building with a seven-year remaining life life is undervalued on Johnson’s books by $222,250. Also, Johnson’s book value for its trademark (10-year life) is undervalued by $310,000. During the year, Johnson reports net income of $96,000 while declaring dividends of $40,000. What is the Investment in Johnson Company balance (equity method) in Franklin’s financial records as of December 31?

A) $599,000

B) $637,400

C) $611,700

D) $624,100

Answer 1

Answer: A) $599,000

Explanation

	$
Purchase price of Johnson stock	601,700.00
Book value of Johnson ($ 1,554,000 - 582,000 × 40%)	(388,800.00)
Cost in excess of book value	212,900.00
		Remaining	Annual
Payment identified with undervalued.		Life	amortization
Building ($222,250 × 40%)	88,900.00	7 year	12,700.00
Trademark ($310,000 × 40%)	124,000.00	10 year	12,400.00
Total			25,100.00
Investment purchase price	601,700.00
Basic income accrual ($96,000 × 40%)	38,400.00
Amortization (above)	(25,100.00)
Dividends declared ($40,000 × 40%)	(16,000.00)
Investment in Johnson	599,000.00