Peanut Company acquired all of stock of Strong Company on january 1, 2015 for $5
ID: 2447907 • Letter: P
Question
Peanut Company acquired all of stock of Strong Company on january 1, 2015 for $500,000 cash. There were no combination or stock issuance costs.
Strong Company's book value was $300,000 at the time of acquisition. Fair market value differed from book balue for two items:
item book value fair value
Land $150,000 $250,000
Equipment(10 yrs life) $300,000 $360,000
In 2015, Strong Company reported $135, 000 of income andpaid $75,000 of dividends.
Question A: Calculate the annual amortization of any difference between fair market value and Strong's book values.
Question B: Then indicate how much investment income Peanut Company would recognize in 2015 under each of the following methods: Initital Value method, Partial equity method, and Equity method
Explanation / Answer
Part A)
The amount to be amortized has been calculated with the use of following table:
The excess of fair value over book value will be allocated and amortized as follows:
Annual amortization would take place only in case of equipment for an amount of $6,000 as land and goowill cannot be amortized.
___________
Part B)
Initial Value Method:
As the name suggests, there will be no change in the investment account, that is, niether the income earned by Strong nor the dividends paid by Strong will have any impact the on the initial amount of investment ($500,000). The balance in investment account would, therefore, continue to be reported as $500,000 only. No additional investment income will be recognized.
___________
Partial Equity Method:
In case of partial equity method, investment account will be adjusted for the income earned by Strong and reduced with the amount of dividends paid by Strong during the year. The net effect has been shown with the use of following table:
Net investment income of $60,000 ($135,000 - 75,000) will be recognized under the partial equity method.
___________
Equity Method:
In case of equity method, investment account will be adjusted for the income earned by Strong and reduced with the amount of dividends paid by Strong during the year. The annual amortization of $6,000 (excess of fair value over book value) would also be reduced. The net effect has been shown with the use of following table:
Net investment income of $54,000 ($135,000 - 75,000 - 6,000) will be recognized under the equity method.
Consideration Transferred 500,000 Less Book Value of Strong on Date of Acquisition 300,000 Fair Value in Excess of Book Value 200,000Related Questions
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