Questions on Company Accounting

Pages: 88 (6419 words) Published: April 17, 2015
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On January 1, Puckett Company paid $2.64 million for 88,000 shares of Harrison’s voting common stock, which represents a 40 percent investment. No allocation to goodwill or other specific account was made. Significant influence over Harrison is achieved by this acquisition and so Puckett applies the equity method. Harrison distributed a dividend of $2 per share during the year and reported net income of $613,000. What is the balance in the Investment in Harrison account found in Puckett’s financial records as of December 31?

$2,709,200.

 
 
 
  Acquisition price
$
2,640,000
 
  Equity income ($613,000 × 40%)
 
245,200
 
  Dividends (88,000 shares × $2)
 
(176,000
)

  Investment in Harrison Corporation as of December 31
$
2,709,200
 

In January 2012, Wilkinson, Inc., acquired 20 percent of the outstanding common stock of Bremm, Inc., for $734,000. This investment gave Wilkinson the ability to exercise significant influence over Bremm. Bremm’s assets on that date were recorded at $4,079,000 with liabilities of $929,000. Any excess of cost over book value of the investment was attributed to a patent having a remaining useful life of 10 years.      In 2012, Bremm reported net income of $257,000. In 2013, Bremm reported net income of $315,250. Dividends of $72,000 were paid in each of these two years. What is the equity method balance of Wilkinson’s Investment in Bremm, Inc., at December 31, 2013?

$798,850.

  
 
 
 
  Acquisition price
$
734,000
 
  Income accruals: 2012—$257,000 × 20%
 
51,400
 
                            2013—$315,250 × 20%  
63,050
 
  Amortization (see below): 2012
 
(10,400
)
  Amortization: 2013
 
(10,400
)
  Dividends: 2012—$72,000 × 20%
 
(14,400
)
                  2013—$72,000 × 20%
 
(14,400
)

  Investment in Bremm, December 31, 2013
$
798,850
 

  
 
 
 
  Acquisition price
$
734,000
 
  Bremm’s net assets acquired ($3,150,000 × 20%)
 
(630,000
)

  Excess cost to patent  
$
104,000
 

  Annual amortization (10 year life)
$
10,400
 

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Ace purchases 40 percent of Baskett Company on January 1 for $593,600. Although Ace did not use it, this acquisition gave Ace the ability to apply significant influence to Baskett’s operating and financing policies. Baskett reports  assets on that date of $1,589,000 with liabilities of $592,000. One building with a seven-year life is undervalued on Baskett’s books by $234,500. Also, Baskett’s book value for its trademark (10-year life) is undervalued by $252,500. During the year, Baskett reports net income of $172,000 while paying dividends of $110,000. What is the Investment in Baskett Company balance (equity method) in Ace’s financial records as of December 31?


$594,900.

  

 
 
 
 

  Purchase price of Baskett stock

$
593,600
 
 
 
 
 
 

  Book value of Baskett ($997,000 × 40%)

 
(398,800
)
 
 
 
 
 

 
 
 
 
 

     Cost in excess of book value

$
194,800
 
 
 
 
 
 

  Payment identified with undervalued

 
 
 
Life
 
Annual
Amortization
 

     Building ($234,500 × 40%)

 
93,800
 
7 yrs.
 
$
13,400   
 

     Trademark ($252,500 × 40%)

 
101,000
 
10 yrs.
 
 
10,100   
 

 
 

  Total

$
0
 
 
 
$
23,500   
 

 
 

  
 
 
 
  Cost of investment
$
593,600
 
     Basic income accrual ($172,000 × 40%)
 
68,800
 
     Amortization (above)
 
(23,500
)
     Dividend collected  ($110,000 × 40%)
 
(44,000
)

  Investment in Baskett as of December 31
$
594,900
 

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Goldman Company reports net income of $182,000 each year and pays an...
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