Savannah Corp. purchased 80% of Athens Inc. on 11/1/2020 for $12 million. On 11/1/2020, Athens had the

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Question:

Savannah Corp. purchased 80% of Athens Inc. on 11/1/2020 for $12 million.

On 11/1/2020, Athens had the following balances:

Assets

Cash 1,000,000

Inventory 1,500,000

PP&E, net 9,300,000

Liabilities

Provisions 700,000

Long-term debt 2,000,000

Equity

Common stock 1,500,000

Retained earnings (9/30/20) 7,300,000

Temporary

Revenue 1,000,000

Expenses 600,000

Dividends 100,000

In Savannah’s view, Athens’s inventory is actually worth $1,700,000 while the PP&E is overvalued by $300,000 with an average useful life of 10 years, and there are unrecorded provisions of $100,000. An unrecorded license asset is estimated to be worth $500,000 with a 5 year useful life. At 12/31/2020, Athens reports total Q4 revenue of $3,300,000, total expenses of $2,000,000, and total dividends paid of $400,000 for the quarter.

Inventory that contributed half of the fair value adjustment was sold by year end, and the unrecorded provisions were all settled by year-end.

Savannah's market value is $25 million at 11/1 and $30 million at 12/31. Athens has no observable market price.

1). First calculate the total goodwill that will result from the acquisition. (Provide the answer as a whole number.)

2). Savannah uses the equity method of accounting for its investment in Athens. Calculate the equity in earnings Savannah will record (report as a whole number) in Q4 2020.

3). Now assume Savannah uses the initial value method for recording the Athens investment. Which adjusting entries for Q4 2020 would need to be added, eliminated, or changed?

4). Provide the additional adjusting entry needed in the Q1 2021 worksheet necessitated by using the initial value rather than equity method. Show your calculations so that it is easy to avoiding penalizing you again for an earlier mistake.