On January 1, 2017, Ridge Road Company acquired 20 percent of the voting shares of Sauk Trail,

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On January 1, 2017, Ridge Road Company acquired 20 percent of the voting shares of Sauk Trail, Inc., for $2,700,000 in cash. Both companies provide commercial Internet support services but serve markets in different industries. Ridge Road made the investment to gain access to Sauk Trail's board of directors and thus facilitate future cooperative agreements between the two firms. Ridge Road quickly obtained several seats on Sauk Trail's board which gave it the ability to significantly influence Sauk Trail's operating and investing activities. The January 1, 2017, carrying amounts and corresponding fair values for Sauk Trail's assets and liabilities follow:
____________________ Carrying Amount _______ Fair Value
Cash and receivables ............$ 110,000 ...................$ 110,000
Computing equipment ..........5,000,000 ................ 5,700,000
Patented technology ............ 100,000 ................. 4,000,000
Trademark ........................ 150,000 ..................2,000,000
Liabilities .........................(185,000) .................(185,000)
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 three-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:
_____________ Net Income _________ Dividends Declared
2017............. $1,800,000 ..................... $150,000
2018 ............. 1,985,000 ....................... 160,000
a. How much of Ridge Road's $2,700,000 payment for Sauk Trail is attributable to goodwill?
b. What amount should Ridge Road report for its equity in Sauk Trail's earnings on its income statements for 2017 and 2018?
c. What amount should Ridge Road report for its investment in Sauk Trail on its balance sheets at the end of 2017 and 2018?
Goodwill
Goodwill is an important concept and terminology in accounting which means good reputation. The word goodwill is used at various places in accounting but it is recognized only at the time of a business combination. There are generally two types of...
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Advanced Accounting

ISBN: 978-1259444951

13th edition

Authors: Joe Ben Hoyle, Thomas Schaefer, Timothy Doupni

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