Problem 1-8 (LU 1-3, 1-4) 00 Franklin purchases 40 percent of Johnson Company on January 1...

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Problem 1-8 (LU 1-3, 1-4) 00 Franklin purchases 40 percent of Johnson Company on January 1 for $617,100. Although Franklin di

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Answer 1

Answer #1

Equity method is one of methods to account for investment in another company where there is significant influence over the company in investing. Net income of investee increases investor’s asset value on balance sheet.

Purchase price of Johnson stock	$ 617,100
Less: Book value of Johnson [(1515,000-548,000) * 40%]	386,800
Cost in excess of book value	230,300

	Amount	Remaining life	Annual amortization
Payment identified with undervalued
Building (243,250 * 40%)	97,300	7	13,900
Trademark (332,500 * 40%)	133,000	10	13,300
Total			27,200

Investment purchase price	617,100
Basic income accrual ($140,000 × 40%)	56,000
Amortization (above)	(27,200)
Dividends declared ($70,000 × 40%)	(28,000)
Investment in Johnson	$ 617,900

Hence, investment in Johnson in franklin's book = $ 617,900

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