Question

Franklin purchases 40 percent of Johnson Company on January 1 for $500,000. Although Franklin did not use it, this acquisition gave Franklin the ability to apply significant influence to Johnson’s operating and financing policies. Johnson reports assets on that date of $1,400,000 with liabilities of $500,000. One building with a seven-year remaining life is undervalued on Johnson’s books by $140,000. Also, Johnson’s book value for its trademark (10-year remaining life) is undervalued by $210,000. During the year, Johnson reports net income of $90,000 while declaring dividends of $30,000. What is the Investment in Johnson Company balance (equity method) in Franklin’s financial records as of December 31

Answer 1

Answer: the correct answer is $ 507,600.00

Explanation:

Firts Step

Purchase price of Johnson stock of $500,000

Less Book Value of Johnson ($900 x 40%) = ($360,000)

Equals Cost in Excess of BV of $140,000

Second Step

Payment identified with undervalued Building of ($140,000 x 40%) = $56,000/7 yr life = $8,000 Annual Amortization

Payment identified with undervalued Trademark of ($210,000 x 40%) = $84,000/10 yr life = $8,400.

Total Annual Amortization is $16,400

Cost in Excess of BV of $140,000

Less Building $56,000 , Less Trademark $84,000  (

Equals Zero

Third step

Cost of Investment of $500,000

Add Basic Income Accrual of ($90,000 x 40%) = $36,000

Less Amortization (above) of ($16,400) , Less Dividends Declared of ($30,000 x 40%) = ($12,000)

$500,000+ $36,000 - $16,400 - $12,000=  $507,600.

Equals Investment in Johnson of $507,600