Jacob Corporation paid $ 536,200 for a 30% share of Gardner Enterprises on January 1 of the current year. Gardner reported net assets of $ 1,414,000 on the date of acquisition. On the date of acquisition, it was determined that Gardner’s plant assets were undervalued by $ 118,000. Gardner’s plant assets have a 10- year remaining life and are depreciated by the straight- line method with no residual value. Gardner reported net income of $ 224,000 and declared and paid cash dividends of $ 182,000 during the current year. Finally, Gardner’s common shares are valued at $ 1,737,667 at the end of the current year.
Required
a. Compute the amount of goodwill on the exchange, if any, assuming the equity method is used to account for the investment.
b. Prepare all journal entries indicated on the books of the Jacob Corporation under the fair value option and equity methods.
c. Assume that Jacob Corporation sold the investment for $ 540,000 at the beginning of the next year. Prepare the journal entries required to record the sale of the investment under both the fair value option and the equity methods.
d. Prepare a schedule that compares the amount and timing of revenue recognition for the fair value option and the equity methods.