Jaynes Inc. acquired all of Aaron Co.\'s common stock on January 1, 2012, by iss
ID: 2492166 • Letter: J
Question
Jaynes Inc. acquired all of Aaron Co.'s common stock on January 1, 2012, by issuing 11,000 shares of $1 par value common stock. Jaynes' shares had a $17 per share fair value. On that date, Aaron reported a net book value of $120,000. However, its equipment (with a five-year remaining life) was undervalued by $6,000 in the company's accounting records. Any excess of consideration transferred over fair value of assets and liabilities is assigned to an unrecorded patent to be amortized over ten years.
What balance would Jaynes' Investment in Aaron Co. account have shown on December 31, 2012, when the equity method was applied for this acquisition?
An allocation of the acquisition value (based on the fair value of the shares issued) must first be made.
Explanation / Answer
Acquisition value (11,000 shares * $17
$ 187,000.00
Book value
-$ 120,000.00
Excess of fair value over book value
$ 67,000.00
Equipment undervalued in book
$ 6,000.00
Patent
$ 61,000.00
Value of equipment
$ 6,000.00
Useful life
5 years
Annual amortisation
$ 1,200.00
Value of Patent
$ 61,000.00
Useful life
10 year
Annual amortisation
$ 6,100.00
Original acquisition value
$ 187,000.00
2012 Income accrual ($276,000 - $144,000)
$ 132,000.00
2012 dividends paid by Aaron
-$ 60,000.00
2012 Amortisation ($1,200 + $6100)
-$ 7,300.00
Investment in Aaron Co. - December 31, 2012
$ 251,700.00
Acquisition value (11,000 shares * $17
$ 187,000.00
Book value
-$ 120,000.00
Excess of fair value over book value
$ 67,000.00
Equipment undervalued in book
$ 6,000.00
Patent
$ 61,000.00
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