In 2018, Babcock Industries, a calendar year corporation, acquired a 10% interest in Caraway, Inc. for $65,000. Babcock appropriately used the fair value method to account for the investment. At the beginning of 2021, Babcock acquired an additional 25% of the outstanding common stock of Caraway for $250,000. The following additional information is available at the date of purchase related to Caraway's activity for the years 2018-2020:
Cumulative dividends paid by Caraway ............................... $150,000
Cumulative income reported by Caraway ............................. $400,000
Cumulative fair value adjustment in Babcock's balance sheet...... $ 35,000
Caraway's balance sheet on the date of the additional purchase is as follows:

Babcock based its price for the additional 25% investment on the fact that Caraway has a patent that Babcock estimates is worth $500,000. The patent will expire in 10 years.
Subsequent to the investment, Caraway reports earnings of $200,000 and pays $90,000 in dividends. In addition, Babcock sells inventories to Caraway that cost $50,000 for a sales price of $80,000. At the end of 2021, 60% of the inventories are still held by Caraway.
REQUIRED:
Prepare a fair value allocation schedule for Babcock's 35% interest in Caraway.

Transcribed Image Text:

Accounts receivable S100,000 Mortgage payable S200,000 Inventories 200,000 400,000 Stockholders' equity Building 500,000 $700,000 Total liabilities and equity Total assets S700,000