John Corporation acquired a 70 percent interest in Jojo
Question:John Corporation acquired a 70 percent interest in Jojo Corporation on April 1, 2011, when it purchased 14,000 of Jojo's 20,000 outstanding shares in the open market at $13 per share. Additional costs of acquiring the shares consisted of $10,000 legal and consulting fees. Jojo Corporation's balance sheets on January 1 and April 1, 2011, are summarized as follows (in thousands):https://www.solutioninn.com/images3/55-B-A-I(274).PNG
ADDITIONAL INFORMATION
1. The overvalued inventory items were sold in September 2011.
2. The undervalued items of equipment had a remaining useful life of four years on April 1, 2011.
3. Jojo's net income for 2011 was $80,000 ($60,000 from April to December 31, 2011).
4. On December 1, 2011, Jojo declared dividends of $2 per share, payable on January 10, 2012.
5. Any unidentified assets of Jojo are not amortized.
REQUIRED
1. Prepare a schedule showing how the difference between John's investment cost and book value acquired should be allocated to identifiable and/or unidentifiable assets.
2. Calculate John's investment income from Jojo for 2011.
3. Determine the correct balance of John's Investment in Jojo account at December 31,2011.
Answer:
1
Schedule to allocate excess cost over book value
Investment cost (14,000 shares $13) $10,000 direct costs must be expensed.$182,000
Book value acquired $190,000 70% 133,000
Excess cost over book value$ 49,000
Excess allocated
Interest
Fair Value xBook ValueAcquired = Allocation
Inventories$50,000$60,00070%$ (7,000)
Land50,00030,00070%14,000
Equipment X net135,00095,00070%28,000
Remainder to goodwill
14,000
Excess cost over book value
$ 49,000
2 Investment income from Jojo
Share of Jojo’s reported income $60,000 70%$ 42,000
Add: Overvalued inventory items7,000
Less: Depreciation on undervalued equipment
($28,000/4 years) 3/4 year(5,250)
Investment income from Jojo$ 43,750
3 Investment in Jojo account at December 31, 2011
Investment cost$182,000
Add: Income from Jojo43,750
Less: Dividends received (14,000 shares $2) (28,000)
Investment in Jojo balance December 31$197,750
Check
Underlying equity at December 31, 2011 ($210,000 70%)*$147,000
Add: Unamortized excess of cost over book value
Land14,000
Equipment22,750
Goodwill14,000
Investment balance$197,750
$100,000 (C/S) + $70,000 (R/E) + $80,000 (current earnings) -$40,000 (Dividends) = $210,000
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