Exercise 4 (LO 2) Block purchase, influence, then control. Cleft Company purchased a 20% interest in Key Industries on January 1, 20X2, for $100,000 and another 60% interest on January 1, 20X4, for $360,000. Key had the following stockholders’ equity balances immediately prior to each purchase:

Stockholders’ Equity Jan. 1, 20X2 Jan. 1, 20X4 Common stock ($1 par) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 50,000 $ 50,000 Paid-in capital in excess of par . . . . . . . . . . . . . . . . . . . . . . . . 400,000 400,000 Retained earnings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20,000 100,000 Total equity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $470,000 $550,000 Cleft’s analysis on the two purchase dates revealed the following: (1) On January 1, 20X2, Key’s equipment was undervalued by $10,000 and had a remaining life of 5 years. (2) On January 1, 20X4, Key’s equipment was undervalued by $9,000, with a 3-year remaining life. (3) Any excess is attributable to goodwill.

Key had income of $30,000 in 20X4 and $50,000 in 20X5 and paid its first dividend, a $0.20 per share dividend to common stock, on December 30, 20X5.

1. Prepare a determination and distribution of excess schedule for each investment.

2. Assuming the cost method is used for both investments, prepare the calculations necessary to convert the investment account to its simple-equity-adjusted balance on December 31, 20X5.