On January 2, 2006, Pagan Corporation acquired 40% of theoutstanding common stock of Sancto Company for $1,000,000. On thatdate, the current fair value of Sancto's identifiable net assetswas $2,000,000, and Pagan did not attribute the excess of the costof its investment in Sancto over its equity in Sancto'sidentifiable net assets to any one factor. Sancto's 2006 net incomewas $250,000. Pagan planned to increase its investment in Sancto toa controlling interest, and Pagan accounted for its investment inSancto under the equity method of accounting. The maximum amountthat may be included in Pagan's 2006 income before income taxes toreflect investment income from Sancto is:
$95,000
$100,000
$200,000
$245,000
$95,000
$100,000
$200,000
$245,000
Related questions
Consolidation Eliminating Entries at End of FirstYear
Peak Entertainment acquires 60 percent of its subsidiarySaddlestone Inc. on January 1, 2016. In preparing to consolidatePeak and Saddlestone at December 31, 2016, we assemble thefollowing information:
Value of stock given up to acquire Saddlestone: $10,000,000.
Direct merger costs: $250,000.
Saddlestone's stockholders' equity at acquisition:$7,200,000.
Fair value of earnings contingency agreement to be paid in cash:$300,000.
Fair value of previously unrecorded identifiable intangibles(5-year life): $2,000,000.
Goodwill and identifiable intangibles are not impaired in2016.
Fair value of the 40 percent noncontrolling interest atacquisition: $6,500,000.
Saddlestone's net income in 2016: $3,000,000.
Saddlestone's dividends declared and paid in 2016:$1,000,000.
Peak uses the complete equity method to report the investment onits own books.
Required
(a) Calculate total goodwill and its allocation to thecontrolling and noncontrolling interests.
| Allocationof goodwill between controlling and noncontrolling interest: | |
|---|---|
| Total goodwill | $Answer |
| Peaks goodwill: | Answer |
| Goodwill to noncontrolling interest | $Answer |
(b) Calculate equity in net income for 2016, as reported onPeak's books, and the noncontrolling interest in net income, asreported on the consolidated income statement for 2016.
| 2016 equityin net income and noncontrolling interest in net income: | |
|---|---|
| Total | $Answer |
| Equity in NI: | Answer |
| Noncontrolling interest in NI | $Answer |
(c) Prepare the consolidation eliminating entries made atDecember 31, 2016.
| Consolidation Journal | ||
|---|---|---|
| Description | Debit | Credit |
| (C) | ||
| AnswerIdentifiable intangiblesEquity in net income ofSaddlestoneCashDividends - Saddlestone | Answer | Answer |
| AnswerEquity in net income of SDividends -SaddlestoneIdentifiable intangiblesCash | Answer | Answer |
| Investment in Saddlestone | Answer | Answer |
| (E) | ||
| AnswerIdentifiabl intangiblesStockholders' equity-Saddlestone,1/1CashInvestment in Saddlestone | Answer | Answer |
| AnswerCashIdentifiabl intangiblesInvestment inSaddlestoneStockholders' equity-Saddlestone, 1/1 | Answer | Answer |
| Noncontrolling interest in Saddlestone | Answer | Answer |
| (R) | ||
| AnswerAmortization expenseCashIdentifiableintangiblesInvestment in Saddlestone | Answer | Answer |
| Goodwill | Answer | Answer |
| AnswerCashInvestment in SaddlestoneIdentifiableintangiblesAmortization expense | Answer | Answer |
| Noncontrolling interest in Saddlestone | Answer | Answer |
| (O) | ||
| AnswerDividends - SaddlestoneIdentifiableintangiblesCashAmortization expense | Answer | Answer |
| AnswerIdentifiable intangiblesDividends -SaddlestoneAmortization expenseCash | Answer | Answer |
| (N) | ||
| AnswerDividends - SaddlestoneIdentifiableintangiblesNoncontrolling interest in income ofSaddlestoneCash | Answer | Answer |
| AnswerCashNoncontrolling interest in income ofSaddlestoneIdentifiable intangiblesDividends - Saddlestone | Answer | Answer |
| Noncontrolling interest in Saddlestone | Answer | Answer |
On January 1, 2017, Ridge Road Company acquired 30 percent ofthe voting shares of Sauk Trail, Inc., for $4,700,000 in cash. Bothcompanies provide commercial Internet support services but servemarkets in different industries. Ridge Road made the investment togain access to Sauk Trail's board of directors and thus facilitatefuture cooperative agreements between the two firms. Ridge Roadquickly obtained several seats on Sauk Trail's board which gave itthe ability to significantly influence Sauk Trail's operating andinvesting activities.
The January 1, 2017, carrying amounts and corresponding fairvalues for Sauk Trail's assets and liabilities follow:
| Carrying Amount | Fair Value | |||||
| Cash and receivables | $ | 210,000 | $ | 210,000 | ||
| Computing equipment | 5,900,000 | 7,300,000 | ||||
| Patented technology | 200,000 | 4,200,000 | ||||
| Trademark | 250,000 | 2,200,000 | ||||
| Liabilities | (285,000 | ) | (285,000 | ) | ||
Also as of January 1, 2017, Sauk Trail's computing equipment hada seven-year remaining estimated useful life. The patentedtechnology was estimated to have a three-year remaining usefullife. The trademark's useful life was considered indefinite. RidgeRoad attributed to goodwill any unidentified excess cost.
During the next two years, Sauk Trail reported the following netincome and dividends:
| Net Income | Dividends Declared | |||||
| 2017 | $ | 2,000,000 | $ | 250,000 | ||
| 2018 | 2,185,000 | 260,000 | ||||
How much of Ridge Road's $4,700,000 payment for Sauk Trail isattributable to goodwill?
What amount should Ridge Road report for its equity in SaukTrail's earnings on its income statements for 2017 and 2018?
What amount should Ridge Road report for its investment in SaukTrail on its balance sheets at the end of 2017 and 2018?
