On January 1, 2017, Ridge Road Company acquired 25 percent of the voting shares
ID: 2595850 • 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
Notes
Carrying Amount
Fair value
excess
25% share
useful life
Amortization
Cash and receivable
180000
180000
0
Computing equipment
5630000
6820000
1190000
297500
7 years
42500
Patent
170000
4140000
3970000
992500
5 Years
198500
Trademark
220000
2140000
1920000
480000
Indefinite
0
Less: Liabilities
-255000
-255000
0
5945000
13025000
1770000
A
How much of Ridge road's $4,100,000 payment for sauk trail is attributable to goodwill?
Acquistion price
4100000
Book value acquired (5945000*25%)
1486250
Excess Payment
5586250
Less: Excesss fair value share
1770000
Goodwill
3816250
Amortization:
Computing equipment
42500
Patent
198500
Trademark
0
Goodwill
0
Annual amortization
241000
b
what amount should ridge road report for its equity sauk trail earnings on its income statements?
$
Basic equity accrual 2017 (1940000*25%)
485000
Amortization
241000
Equity in earnings of sauk trail
244000
Basic equity accrual 2018 (2125000*25%)
531250
Amortization
241000
Equity in earnings of sauk trail
290250
c
On its balance sheet at the end of 2017 and 2018
$
Acquistion price
4100000
Equity in 2017 earnings of sauk trail
244000
Dividends 2017 (220,000*25%)
-55000
Investment in sauk trail 2017
4289000
Investment in sauk trail 2017
4289000
Equity in 2018earnings of sauk trail
290250
Dividends 2018 (230,000*25%)
-57500
Investment in sauk trail 2018
4521750
Notes
Carrying Amount
Fair value
excess
25% share
useful life
Amortization
Cash and receivable
180000
180000
0
Computing equipment
5630000
6820000
1190000
297500
7 years
42500
Patent
170000
4140000
3970000
992500
5 Years
198500
Trademark
220000
2140000
1920000
480000
Indefinite
0
Less: Liabilities
-255000
-255000
0
5945000
13025000
1770000