Thow Corporation purchased 40 % of the 300,000 outstanding shares of TJ Fine Foo

Question

Thow Corporation purchased 40 % of the 300,000 outstanding shares of TJ Fine Foods, Inc. on January 1 of the current year. Thow acquired the shares at a price of $ 3.90 per share. The following additional data were available for TJ Fine Foods, Inc. on the date of acquisition. Book ValuesFair Values Description Current Assets Depreciable Assets (10-year remaining life/straight-line depreciation) Total Assets $250,000 185,000 $435,000 $250,000 221,000 $471,000 Liabilities $34,000 $34,000 Contributed Capital (Common Stock and Additional Paid-in Capital) Retained Earnings Total Shareholders' Equity $285,000 116,000 $401,000 $285,000 152,000 $437,000 Total Liabilities and Stockholders' Equity $435,000 $471,000 TJ Fine Foods, Inc. reported net income of $ 70,000 at the end of the current year and declared and paid cash dividends of $ 27,500 during the current year. a. Compute the amount of goodwill implied on Thow's acquisition of TJ Fine Foods shares. repare all journal entries necessary to account for this investment in TJ's under the equity method

Explanation / Answer

Solution:-

a) Calculation of Amount of Goodwill:-

Total Assets = $435000

Liabilities = 34000

Net Worth = 401000

40% of Net Worth = $160400

Consideration Paid = 300000*40%*3.09 = $370800

Goodwill:- 370800-160400 = $210400

b) Investment in TJ Fines Food A/c Dr $160400

Goodwill A/c Dr 210400

To Bank A/c $370800

(Being Investment Booked as per Equity Method0

Investment in TJ Fines A/c Dr $28000 (70000*40%)

To Income from Investment A/c $28000

(Being Income from Investment Booked)

Bank A/c Dr $11000

To Dividend From TJ Fines A/c $11000

(Being Dividiend Income received)

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