Question

On January 1, 2018, Jackie Corp. purchased 30% of the voting common stock of Rob Co., paying $2,000,000. Jackie properly accounts for this investment using the equity method. At the time of the investment, Rob's total stockholders' equity was $3,000,000. Jackie gathered the following information about Rob's assets and liabilities whose book values and fair values differed:

Buildings (15-year life) $1,000,000- BV $1,500,000 - FV

Equipment (5-year life) $2,500,000 - BV $3,000,000 - FV

Franchises (10-year life) $0 - BV $500,000 - FV

1. How much goodwill is associated with this investment? Please show calculation.

2. What is the amount of excess amortization expense for Jackie Corp's investment in Rob Co. for year 2018? Please show calculation.

Answer 1

Book value [A] $ 1,000,000 2,500,000 Fair Value [B] $ 1,500,000 3,000,000 500,000 $ 5,000,000 Undervalued/ (Overvalued) [B-A) $ 500,000 500,000 500,000 1,500,000 $ 3,500,000 $ Buildings Equipment Franchises Total 1) Consideration paid for 30% share Less: Book value of 30% share (3,000,000 x 30%) Excess of Total price paid over book value Allocation of Excess value to specified assets Buildings (500,000 x 30%) Equipment (500,000 x 30%) Franchises (500,000 x 30%) Goodwill 2,000,000 (900,000) 1,100,000 $ (150,000) (150,000) (150,000) 650,000 Goodwill associated with this Investment $ 650,000 2)Calculation of excess amortization Initial Value life [B] Amortization [C = A/B] $ 15 Buildings Equipment Franchises Total 500,000 500,000 500,000 1,500,000 33,333 100,000 50,000 183,333 Amortization related to this investment [C x 30% ] $ 10,000 30,000 15,000 $ 55,000 Excess Amortization expense for Jackie Rob's Investment $ 55,000