Question

On January 1, 2020, Ridge Road Company acquired 20 percent of the voting shares of Sauk Trail, Inc., for $2,800,000 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	$	115,000		$	115,000
Computing equipment		5,045,000			5,780,000
Patented technology		105,000			4,010,000
Trademark		155,000			2,010,000
Liabilities		(190,000	)		(190,000	)

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	$	1,810,000	$	155,000
2021		1,995,000		165,000

1. How much of Ridge Road’s $2,800,000 payment for Sauk Trail is attributable to goodwill?

2. What amount should Ridge Road report for its equity in Sauk Trail’s earnings on its income statements for 2020 and 2021?

3. 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

Requirement 1)

Particulars	Amount ($)
Cash and Receivables	$        115,000
Computing Equipment	$     5,045,000
Patented Technology	$        105,000
Trademark	$ 155,000
Carrying value of total assets	$ 5,420,000
Less : Liabilities	$      (190,000)
Carrying value of Net Assets	$     5,230,000
Particulars	Amount ($)
Payment by Ridge Road Company	$ 2,800,000
Less : Book value acquired [20% * 5,230,000]	$   (1,046,000)
Payment in excess of book value	$ 1,754,000
Excess payment identification :
Computing Equipment [5,780,000 - 5,045,000] * 20%	$      (147,000)
Patent Technology [4,010,000 - 105,000] * 20%	$      (781,000)
Trademark [2,010,000 - 155,000] * 20%	$      (371,000)
Goodwill	$        455,000

.

Requirement 2)

Particulars	Amount ($)
Income reported by Sauk Trail in 2020	$     1,810,000
Rail Ridge Ownership	20%
Accrual in 2020 [1,810,000 * 20%]	$        362,000
Less : Amortization Expenses
Computing Equipment(147,000 / 7)	$         (21,000)
Patented Technology (781,000 / 7)	$      (111,571)
Equity in Sauk Trail's earnings - 2020	$        229,429
Particulars	Amount ($)
Income reported by Sauk Trail in 2021	$     1,995,000
Rail Ridge Ownership	20%
Accrual in 2021 [1,995,000 * 20%]	$        399,000
Less : Amortization Expenses
Computing Equipment(147,000 / 7)	$         (21,000)
Patented Technology (781,000 / 7)	$      (111,571)
Equity in Sauk Trail's earnings - 2021	$        266,429

.

Requirement 3)

Particulars	Amount ($)
Cost of Investment in Sauk Trail - 2020	$ 2,800,000
Add : Equity in Sauk Trail's earnings - 2020	$        229,429
Less : Share in dividends [155,000 * 20%]	$         (31000)
Investment in Sauk Trail reported in Balance Sheet in 2020	$    2,998,429
Particulars	Amount ($)
Cost of Investment in Sauk Trail - 2021	$     2,998,429
Add : Equity in Sauk Trail's earnings - 2021	$        266,429
Less : Share in dividends [165,000* 20%]	$         (33,000)
Investment in Sauk Trail reported in Balance Sheet in 2021	$    3,231,858

.