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15. On January 1, 2017, Ridge Road Company acquired 20 percent of the voting shares of...

15. On January 1, 2017, Ridge Road Company acquired 20 percent of the voting shares of Sauk Trail, Inc., for $2,700,000 in ca

15. On January 1, 2017, Ridge Road Company acquired 20 percent of the voting shares of Sauk Trail, Inc., for $2,700,000 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, 2017, carrying amounts and corresponding fair values for Sauk Trail's assets and liabilities follow: Cash and receivables Computing equipment Patented technology Trademark Liabilities Carrying Amount $ 110,000 5,000,000 100,000 150,000 (185,000) Fair Value $ 110,000 5,700,000 4,000,000 2,000,000 (185,000) Also as of January 1, 2017, Sauk Trail's computing equipment had a seven-year remaining estimated useful life. The patented technology was estimated to have a three-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: 2017 2018 Net Income $1,800,000 1,985,000 Dividends Declared $150,000 160,000 a. How much of Ridge Road's $2,700,000 payment for Sauk Trail is attributable to goodwill? b. What amount should Ridge Road report for its equity in Sauk Trail's earnings on its income statements for 2017 and 2018? c. What amount should Ridge Road report for its investment in Sauk Trail on its balance sheets at the end of 2017 and 2018?
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ANSWER:

ans a
Acquisition Price $2,700,000
Bok value acquired (5175000*20%) 1035000
Excess payment $1,665,000
Excess fair value -Computing equipment (700000*20%) 140000
Excess fair value-Patented technology (3900000*20%) 780000
Excess fair value-Trade Mark (1850000*20%) 370000
1290000
ans a Goodwill $375,000
Amortization
Computing equipment (140000/7) 20000
Patented technology (780000/3) 260000
Trademark-indefinate 0
Annual amortization 280000
Carrying Amount Fair Value Difference
Cash and receivables 110,000 110,000 0
Computing equipment 5,000,000 5,700,000 700,000
Patented technology 100,000 4,000,000 3,900,000
Trademark 150,000 2,000,000 1,850,000
Liabilities -185,000 -185,000 0
Net Assets 5,175,000 11,625,000
ans b
Equity income accural 2017 (1800000*20%) 360,000
Amortization for 2017 -280000
Equity in 2017 earnings of Sauk Trail 80000
Equity income accural 2018 (1985000*20%) 397000
Amortization for 2018 -280000
Equity in 2018 earnings of Sauk Trail 117000
ans c
Acquisition Price $2,700,000
Equity in 2017 earnings of Sauk Trail 80000
Dividends-(150000*20%) -30000
Investment in Sauk trail dec 31 2017 $2,750,000
Investment in Sauk trail dec 31 2017 $2,750,000
Equity in 2018 earnings of Sauk Trail 117000
Dividends-(160000*20%) -32000
Investment in Sauk trail dec 31 2017 $2,835,000
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