On January 1, 2014, Ridge Road Company acquired 30 percent of the voting shares
ID: 2479723 • Letter: O
Question
On January 1, 2014, Ridge Road Company acquired 30 percent of the voting shares of Sauk Trail, Inc. for $4,600,000 in cash. Both companies provide commercial Internet support services but serve markets in different industries. Ridge Road made the investment to gain access to Sauk Trail’s board of directors and thus facilitate future cooperative agreements between the two firms. Ridge Road quickly obtained several seats on Sauk Trail’s board which gave it the ability to significantly influence Sauk Trail’s operating and investing activities.
The January 1, 2014, carrying amounts and corresponding fair values for Sauk Trail’s assets and liabilities follow:
Also as of January 1, 2014, Sauk Trail’s computing equipment had a remaining estimated useful life of seven years. The patented technology was estimated to have a three year remaining useful life. The trademark’s useful life was considered indefinite. Ridge Road attributed to goodwill any unidentified excess cost.
What amount should Ridge Road report for its equity in Sauk Trail’s earnings on its income statements for 2014 and 2015?
What amount should Ridge Road report for its investment in Sauk Trail on its balance sheets at the end of 2014 and 2015?
On January 1, 2014, Ridge Road Company acquired 30 percent of the voting shares of Sauk Trail, Inc. for $4,600,000 in cash. Both companies provide commercial Internet support services but serve markets in different industries. Ridge Road made the investment to gain access to Sauk Trail’s board of directors and thus facilitate future cooperative agreements between the two firms. Ridge Road quickly obtained several seats on Sauk Trail’s board which gave it the ability to significantly influence Sauk Trail’s operating and investing activities.
Explanation / Answer
Income statement
2014
2015
1,990,000@30%
2,175,000@30%
Net income reported
597,000
652,500
Balance sheet
2014
2015
Investment opening
4,600,000
5,123,500
Add : net income
597,000
652,500
Less: Dividend paid
(73,500)
(76,500)
Investment to be reported in balance sheet
5,123,500
5,699,500
Income statement
2014
2015
1,990,000@30%
2,175,000@30%
Net income reported
597,000
652,500
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