On January 3, 2007, Austin Corp. purchased 25% of the voting common stock of Gai

Question

On January 3, 2007, Austin Corp. purchased 25% of the voting common stock of Gainsville Co., paying $2,000,000. Austin used the equity method to account for this investment.

At the time of the investment, Gainsville's total stockholders' equity was $6,000,000. Gainsville had franchise agreements with a fair market value of $400,000.

Austin gathered the following information about Gainsville's assets and liabilities:

For all other assets and liabilities, book value and fair market value were equal.

1. Assuming that the franchise agreements are amortized over a period of five years, what is the total amortization for 2007, related to this investment?

2. What is the amount of Goodwill associated with this investment?

Please show your work!

Explanation / Answer

1. This is a case of significant control and will be covered by IAS 28 Investment in associates and joint ventures. In case of the franchisee agrement the associates share of amortization will be adjusted on consolidation Total Amortization per year = 6000000/5 = 1200000 Austin's share = 1200000*25% = 300000 2. As per IAS 28 the amount of Goodwill is determined at the time of time of acquisition Cost of Investment $20,00,000.00 Less: Shareholders Equity * % acquired -$16,00,000.00 (6400000*25%) Goodwill $4,00,000.00 WN: 1 Working showing adjustment for shareholders equity Shareholders equity $60,00,000.00 Adjust: Fair value adjustments Building $1,00,000.00 Equipment $3,00,000.00 Adjusted Equity $64,00,000.00

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