On 1/1/22 Big Co acquired 100% of Little Co voting stock for $500,000. On that date...

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On 1/1/22 Big Co acquired 100% of Little Co voting stock for $500,000. On that date...

On 1/1/22 Big Co acquired 100% of Little Co voting stock for $500,000. On that date Little's book value was $350,000. Little had the following misvalued assets and liabilities at 1/1/22:

Land, undervalued by $20,000

Inventory, FIFO basis, undervalued by $10,000

PPE, 5 year remaining life, undervalued by $80,000.

Bonds payable, 10 year life, undervalued by $20,000

During 2022 Little reported earnings of $80,000 and paid dividends of $10,000

1. How much goodwill was inherent in the purchase of Little?

2. Assuming Big uses the equity method, what would be the reported investment income for 2022?

3. What would be the balance in the "Investment in Little" after all of the 2022 entries?

business accounting

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Answer 1

Answer #1

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2)		Amount $
	Little earnings	80,000
	Less: Inventory undervalued FIFO	10,000
	Less: PPE Amortization	16,000	=80000/5
	Add: Bond Payable Undervalued	2,000	=20000/10
	Adjusted earnings of of Little	56,000

	Reported Investment income for 2022	$ 56,000	=56000*100%


3)		Amount $
	Purchase Cost	500,000
	Add: Investment income for 2022	56,000
	Less: Dividend received ( 10,000 x 100% )	-10,000
	Balance in Investment in little	546,000

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