Plum Corporation paid $700,000 for a 40% interest in Satin Company on January 1,
ID: 2488172 • Letter: P
Question
Plum Corporation paid $700,000 for a 40% interest in Satin Company on January 1, 2013 when Plum's stockholders' equity was as follows:
10% cumulative preferred stock, $100 par $500,000
Common stock, $10 par value 300,000
Other paid-in capital 400,000
Retained earnings 800,000
Total stockholders' equity $2,000,000
On this date, the book values of Plum's assets and liabilities equaled their fair values, and there were no dividends in arrears.
Calculate the amount recorded in the investment in Satin Company and the amount of implied goodwill in this transaction.
Explanation / Answer
Cost of Satin investment
(amount recorded in the
Investment account): $700,000
Less: book value acquired:
Total equity $2,000,000
Less: Preferred equity (500,000)
Net common equity 1,500,000
× percent acquired × 40%
= Plum book value acquired (600,000)
Goodwill $100,000