Problem 7-3 (LO 2) Worksheet, blocks, control with second block. On January 1, 20X4, Madden Company purchased a 20% interest in Clayton Company for $100,000. Two years subsequent to this purchase, Madden Company acquired an additional 45% interest in Clayton Company for $250,000.

Balance sheets of Clayton Company immediately prior to these purchases were as follows:

Assets Jan. 1, 20X4 Jan. 1, 20X6 Current assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $150,000 $120,000 Land . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 150,000 150,000 Equipment (net) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 200,000 300,000 Total assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $500,000 $570,000 Liabilities and Equity Liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $100,000 $110,000 Equity:

Common stock ($5 par) . . . . . . . . . . . . . . . . . . . . . . . . . . . 100,000 100,000 Paid-in capital in excess of par . . . . . . . . . . . . . . . . . . . . . . . 150,000 150,000 Retained earnings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 150,000 210,000 Total equity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $400,000 $460,000 Total liabilities and equity . . . . . . . . . . . . . . . . . . . . . . . . . . . . $500,000 $570,000 On January 1, 20X4, and January 1, 20X6, Clayton’s book values approximated fair values, except for the land, which was undervalued by $50,000. Any remaining excess is attributed to a patent with a 10-year life starting Jan. 1, 20X4.

The original 20% investment had been maintained under the sophisticated equity method.

Since it now will be necessary to prepare consolidated statements, the simple equity method is in use for 20X6.

On December 31, 20X6, Madden’s investment in Clayton Company was determined as follows:

Original cost of 20% investment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $100,000 20X4–X5 equity adjustment, net of excess amortization . . . . . . . . . . . . . . . . . . . . . . 10,000 Original cost of 45% investment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 250,000 65% of income, January 1, 20X6–December 31, 20X6 . . . . . . . . . . . . . . . . . . . . . . 26,000 Investment in Clayton Company . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $386,000