On January 1, 2017, Ridge Road Company acquired 25 percent of the voting shares
ID: 2605954 • Letter: O
Question
On January 1, 2017, Ridge Road Company acquired 25 percent of the voting shares of Sauk Trail, Inc., for $4,100,000 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:
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 five-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:
How much of Ridge Road's $4,100,000 payment for Sauk Trail is attributable to goodwill?
What amount should Ridge Road report for its equity in Sauk Trail's earnings on its income statements for 2017 and 2018?
What amount should Ridge Road report for its investment in Sauk Trail on its balance sheets at the end of 2017 and 2018?
Carrying Amount Fair Value Cash and receivables $ 180,000 $ 180,000 Computing equipment 5,630,000 6,820,000 Patented technology 170,000 4,140,000 Trademark 220,000 2,140,000 Liabilities (255,000 ) (255,000 )Explanation / Answer
Answer a. Acquisition Price 4,100,000 Less: Book Value Acquired ($5,945,000 X 25%) (1,486,250) Excess Payment 2,613,750 Less: Excess Fair Value: Computing Equipment - ($6,820,000 - $5,630,000) X 25% (297,500) Patented Technology - ($4,140,000 - $170,000) X 25% (992,500) Trademark - ($2,140,000 - $220,000) X 25% (480,000) Goodwill 843,750 Answer b. Basic Equity Accrual 2017 - $1,940,000 X 25% 485,000.00 Less: Amoritization of Excess Fair Value: Computing Equipment - $238,000 / 7 Years (42,500.00) Patented Technology - $794,000 / 5 Years (198,500.00) Trademarks - Indefinite Life - Goodwill - Indefinite Life - Equity in 2017 earnings of Sauk Trail 244,000.00 Basic Equity Accrual 2018 - $2,125,000 X 25% 531,250.00 Less: Amoritization of Excess Fair Value: Computing Equipment - $238,000 / 7 Years (42,500.00) Patented Technology - $794,000 / 5 Years (198,500.00) Trademarks - Indefinite Life - Goodwill - Indefinite Life - Equity in 2018 earnings of Sauk Trail 290,250.00 Answer c. Acquisition price 4,100,000.00 Equity in 2017 earnings of Sauk Trail 244,000.00 Less: Dividends -2017 - $220,000 X 25% (55,000.00) Investments in saudi Trail - 31/12/17 4,289,000.00 Investments in saudi Trail - 31/12/17 4,289,000.00 Equity in 2018 earnings of Sauk Trail 290,250.00 Less: Dividends -2018 - $230,000 X 25% (57,500.00) Investments in saudi Trail - 31/12/18 4,521,750.00
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