On January 1, 2014, Ridge Road Company acquired 25 percent of the voting shares
ID: 2475820 • Letter: O
Question
On January 1, 2014, Ridge Road Company acquired 25 percent of the voting shares of Sauk Trail, Inc. for $3,900,000 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, 2014, carrying amounts and corresponding fair values for Sauk Trail’s assets and liabilities follow:
Also as of January 1, 2014, Sauk Trail’s computing equipment had a remaining estimated useful life of seven years. 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.
What amount should Ridge Road report for its equity in Sauk Trail’s earnings on its income statements for 2014 and 2015?
What amount should Ridge Road report for its investment in Sauk Trail on its balance sheets at the end of 2014 and 2015?
On January 1, 2014, Ridge Road Company acquired 25 percent of the voting shares of Sauk Trail, Inc. for $3,900,000 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.
Explanation / Answer
(a)
Acquisition Price $39,00,000
Less: Book Value Acquired
($5835000*25%) $1458750
Excess Payment $2441250
Excess Fair Value
Computing Equipment($11,20,000*25%) $280000
Patented Technology($3960000*25%) $990000
Trade Mark ($19,10,000*25%) $477500
Goodwill $693750
Amortisation in the Books of Ridge Road Company will be as follows
Computing Equipment ($280000/7) $40000
Patented Technology($990000/3) $3,30,000
Total Annual Amortisation $3,70,000
(b) Basic Equity Accrual in 2014
Net Income ($19,20,000*25%) $480,000
Amortisation as above ($370,000)
Equity in 2014 Earnins in Sauk Trail $110,000
Basic Equity Accrual in 2015
Net Income ($21,05,000*25%) $526250
Amortisation as above $370000
Equity in 2015 Earnings of Sauk Trail $156250
(c)
Acquisiton Price $39,00,000
Equity in 2014 Earnings of Sauk Trail $110,000
Dividends (210000*25%) ($52500)
Investment in Sauk Trail 31/12/2014 $3957500
Investment in Sauk Trail 31/12/2014 $3957500
Equity in 2015 Earnings of Sauk Trail $156250
Dividends ($220000*25%) ($55000)
Investment in Sauk Trail as on 31/12/15 $4058750
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