Asked by Nellies Asante on Jun 14, 2024
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Davis Inc. purchased a controlling interest in Martin Inc. on January 1, 2019, when Martin's common shares and retained earnings were carried at $180,000 and $60,000 respectively. On that date, Martin's book values approximated its fair values, with the exception of the company's inventories and a Patent held by Martin. The patent, which had an estimated remaining useful life of ten years, had a fair value which was $20,000 higher than its book value. Martin's Inventories on January 1, 2019 were estimated to have a fair value that was $16,000 higher than their book value.
It was predicted that Martin's goodwill impairment test, which was to be conducted on December 31, 2020, would result in a loss equal to 10% of the goodwill (regardless of the amount) at the date of acquisition being recorded. During 2019, Martin reported a net income of $60,000 and declared and paid $12,000 in dividends. Martin's 2020 net income and declared and paid dividends were $72,000 and $15,000, respectively. Martin uses straight-line amortization for all of its assets.
Davis uses the Fair Value Enterprise Method.
Assuming that Davis purchases 80% of Martin for $300,000, answer the following:
Required:
a) Prepare Davis' Equity Method journal entries for 2019 and 2020.
b) Compute the following as at December 31, 2020:
i. Investment in Martin Inc.
ii. Goodwill
iii. The amount of unamortized acquisition differential.
Equity Method
A method in accounting for logging investments where the investor holds considerable sway over the entity being invested in, yet lacks full control.
Acquisition Differential
The difference between the purchase price of a company and the net fair value of its identifiable assets and liabilities.
Goodwill
An intangible asset arising from the acquisition of one entity by another, representing the excess of purchase price over the fair market value of identifiable net assets.
- Acquire knowledge on the workings of the Equity Method in accounting for investments.
- Determine and report on goodwill and its reduction in value.
- Ascertain the discrepancy in acquisition value and allocate it to assorted assets and liabilities.
Verified Answer
NS
Narinderpal Singh DhillonJun 18, 2024
Final Answer :
a) Equity Method Journal Entries
2019: Debit Credit Investment in Martin Inc. $300,000 Cash $300,000 Investment in Martin Inc. $48,000 Investment Income $48,000 Investment Income $14,400 Investment in Martin Inc. $14,400 Cash $9,600 Investment in Martin Inc. $9,600 2020: Debit Credit Investment in Martin Inc. $57,600 Investment Income $57,600 Investment Income $9,520 Investment in Martin Inc. $9,520 Cash $12,000 Investment in Martin Inc. $12,000\begin{array}{|c|r|r|}\hline \text { 2019: } & \text { Debit } & \text { Credit } \\ \hline \text { Investment in Martin Inc. } & \$ 300,000 & \\\hline \text { Cash } & & \$ 300,000 \\\hline \text { Investment in Martin Inc. } & \$ 48,000 & \\\hline \text { Investment Income } & & \$ 48,000 \\\hline \text { Investment Income } & \$ 14,400 \\\hline \text { Investment in Martin Inc. } & & \$ 14,400 \\\hline \text { Cash } & \$ 9,600 \\\hline \text { Investment in Martin Inc. } & & \$ 9,600 \\\hline \text { 2020: } & \text { Debit } & \text { Credit } \\\hline \text { Investment in Martin Inc. } & \$ 57,600 \\\hline \text { Investment Income } & & \$ 57,600 \\\hline \text { Investment Income } & \$ 9,520 \\\hline \text { Investment in Martin Inc. } & & \$ 9,520 \\\hline \text { Cash } & \$ 12,000 & \\\hline \text { Investment in Martin Inc. } & & \$ 12,000 \\\hline\end{array} 2019: Investment in Martin Inc. Cash Investment in Martin Inc. Investment Income Investment Income Investment in Martin Inc. Cash Investment in Martin Inc. 2020: Investment in Martin Inc. Investment Income Investment Income Investment in Martin Inc. Cash Investment in Martin Inc. Debit $300,000$48,000$14,400$9,600 Debit $57,600$9,520$12,000 Credit $300,000$48,000$14,400$9,600 Credit $57,600$9,520$12,000
b) i) Investment in Martin Inc.:
Cost: $300,000 Add: 2019 Income: $48,000 Less: 2019 Dividends ($9,600) Less: 2019 Acquisition Differential Amortization: ($14,400) Add: 2020 Income: $57,600 Less: 2020 Dividends ($12,000) Less: 2020 Acquisition Differential Amortization: ($9,520) Investment in Martin Inc., December 31, 2020: $360,080\begin{array}{|l|r|}\hline \text { Cost: } & \$ 300,000 \\\hline \text { Add: } 2019 \text { Income: } & \$ 48,000 \\\hline \text { Less: } 2019 \text { Dividends } & (\$ 9,600) \\\hline \text { Less: } 2019 \text { Acquisition Differential Amortization: } & (\$ 14,400) \\\hline \text { Add: } 2020 \text { Income: } & \$ 57,600 \\\hline \text { Less: } 2020 \text { Dividends } & (\$ 12,000) \\\hline \text { Less: } 2020 \text { Acquisition Differential Amortization: } & (\$ 9,520) \\\hline \text { Investment in Martin Inc., December 31, 2020: } & \$ \mathbf{3 6 0 , 0 8 0} \\\hline\end{array} Cost: Add: 2019 Income: Less: 2019 Dividends Less: 2019 Acquisition Differential Amortization: Add: 2020 Income: Less: 2020 Dividends Less: 2020 Acquisition Differential Amortization: Investment in Martin Inc., December 31, 2020: $300,000$48,000($9,600)($14,400)$57,600($12,000)($9,520)$360,080
ii) Goodwill
Purchase Price of Martin: 80%$300,000 Imputed value at 100%$375,000 Less: book value of Martin’s net identifiable assets $240,000 Acquisition differential $135,000 Less: excess of fair value over book values: Inventories ($20,000) Patent ($16,000) Goodwill at date of acquisition $99,000 Less: impairment loss (10%)($9,900) Goodwill $89,100\begin{array}{|l|c|}\hline \text { Purchase Price of Martin: } 80 \% & \$ 300,000 \\\hline \text { Imputed value at } 100 \% & \$ 375,000 \\\hline \text { Less: book value of Martin's net identifiable assets } & \$ 240,000 \\\hline \text { Acquisition differential } & \$ 135,000 \\\hline \text { Less: excess of fair value over book values: } & \\\hline \text { Inventories } & (\$ 20,000) \\\hline \text { Patent } & (\$ 16,000) \\\hline \text { Goodwill at date of acquisition } & \$ 99,000 \\\hline \text { Less: impairment loss }(10 \%) & (\$ 9,900) \\\hline \text { Goodwill } & \$ 89,100 \\\hline\end{array} Purchase Price of Martin: 80% Imputed value at 100% Less: book value of Martin’s net identifiable assets Acquisition differential Less: excess of fair value over book values: Inventories Patent Goodwill at date of acquisition Less: impairment loss (10%) Goodwill $300,000$375,000$240,000$135,000($20,000)($16,000)$99,000($9,900)$89,100
iii) The only unamortized acquisition differential remaining would be 8/10 of the excess fair value of the patent, which would be $16,000 plus the goodwill of $89,100 for a total of $105,100.
2019: Debit Credit Investment in Martin Inc. $300,000 Cash $300,000 Investment in Martin Inc. $48,000 Investment Income $48,000 Investment Income $14,400 Investment in Martin Inc. $14,400 Cash $9,600 Investment in Martin Inc. $9,600 2020: Debit Credit Investment in Martin Inc. $57,600 Investment Income $57,600 Investment Income $9,520 Investment in Martin Inc. $9,520 Cash $12,000 Investment in Martin Inc. $12,000\begin{array}{|c|r|r|}\hline \text { 2019: } & \text { Debit } & \text { Credit } \\ \hline \text { Investment in Martin Inc. } & \$ 300,000 & \\\hline \text { Cash } & & \$ 300,000 \\\hline \text { Investment in Martin Inc. } & \$ 48,000 & \\\hline \text { Investment Income } & & \$ 48,000 \\\hline \text { Investment Income } & \$ 14,400 \\\hline \text { Investment in Martin Inc. } & & \$ 14,400 \\\hline \text { Cash } & \$ 9,600 \\\hline \text { Investment in Martin Inc. } & & \$ 9,600 \\\hline \text { 2020: } & \text { Debit } & \text { Credit } \\\hline \text { Investment in Martin Inc. } & \$ 57,600 \\\hline \text { Investment Income } & & \$ 57,600 \\\hline \text { Investment Income } & \$ 9,520 \\\hline \text { Investment in Martin Inc. } & & \$ 9,520 \\\hline \text { Cash } & \$ 12,000 & \\\hline \text { Investment in Martin Inc. } & & \$ 12,000 \\\hline\end{array} 2019: Investment in Martin Inc. Cash Investment in Martin Inc. Investment Income Investment Income Investment in Martin Inc. Cash Investment in Martin Inc. 2020: Investment in Martin Inc. Investment Income Investment Income Investment in Martin Inc. Cash Investment in Martin Inc. Debit $300,000$48,000$14,400$9,600 Debit $57,600$9,520$12,000 Credit $300,000$48,000$14,400$9,600 Credit $57,600$9,520$12,000
b) i) Investment in Martin Inc.:
Cost: $300,000 Add: 2019 Income: $48,000 Less: 2019 Dividends ($9,600) Less: 2019 Acquisition Differential Amortization: ($14,400) Add: 2020 Income: $57,600 Less: 2020 Dividends ($12,000) Less: 2020 Acquisition Differential Amortization: ($9,520) Investment in Martin Inc., December 31, 2020: $360,080\begin{array}{|l|r|}\hline \text { Cost: } & \$ 300,000 \\\hline \text { Add: } 2019 \text { Income: } & \$ 48,000 \\\hline \text { Less: } 2019 \text { Dividends } & (\$ 9,600) \\\hline \text { Less: } 2019 \text { Acquisition Differential Amortization: } & (\$ 14,400) \\\hline \text { Add: } 2020 \text { Income: } & \$ 57,600 \\\hline \text { Less: } 2020 \text { Dividends } & (\$ 12,000) \\\hline \text { Less: } 2020 \text { Acquisition Differential Amortization: } & (\$ 9,520) \\\hline \text { Investment in Martin Inc., December 31, 2020: } & \$ \mathbf{3 6 0 , 0 8 0} \\\hline\end{array} Cost: Add: 2019 Income: Less: 2019 Dividends Less: 2019 Acquisition Differential Amortization: Add: 2020 Income: Less: 2020 Dividends Less: 2020 Acquisition Differential Amortization: Investment in Martin Inc., December 31, 2020: $300,000$48,000($9,600)($14,400)$57,600($12,000)($9,520)$360,080
ii) Goodwill
Purchase Price of Martin: 80%$300,000 Imputed value at 100%$375,000 Less: book value of Martin’s net identifiable assets $240,000 Acquisition differential $135,000 Less: excess of fair value over book values: Inventories ($20,000) Patent ($16,000) Goodwill at date of acquisition $99,000 Less: impairment loss (10%)($9,900) Goodwill $89,100\begin{array}{|l|c|}\hline \text { Purchase Price of Martin: } 80 \% & \$ 300,000 \\\hline \text { Imputed value at } 100 \% & \$ 375,000 \\\hline \text { Less: book value of Martin's net identifiable assets } & \$ 240,000 \\\hline \text { Acquisition differential } & \$ 135,000 \\\hline \text { Less: excess of fair value over book values: } & \\\hline \text { Inventories } & (\$ 20,000) \\\hline \text { Patent } & (\$ 16,000) \\\hline \text { Goodwill at date of acquisition } & \$ 99,000 \\\hline \text { Less: impairment loss }(10 \%) & (\$ 9,900) \\\hline \text { Goodwill } & \$ 89,100 \\\hline\end{array} Purchase Price of Martin: 80% Imputed value at 100% Less: book value of Martin’s net identifiable assets Acquisition differential Less: excess of fair value over book values: Inventories Patent Goodwill at date of acquisition Less: impairment loss (10%) Goodwill $300,000$375,000$240,000$135,000($20,000)($16,000)$99,000($9,900)$89,100
iii) The only unamortized acquisition differential remaining would be 8/10 of the excess fair value of the patent, which would be $16,000 plus the goodwill of $89,100 for a total of $105,100.
Learning Objectives
- Acquire knowledge on the workings of the Equity Method in accounting for investments.
- Determine and report on goodwill and its reduction in value.
- Ascertain the discrepancy in acquisition value and allocate it to assorted assets and liabilities.