Asked by Nazareth Valladares on Jun 24, 2024
Verified
The financial statements of Plax Inc. and Slate Corp for the year ended December 31, 2020 are shown below:
Income Statements
PlaxInc. Slate Corp Miscellaneous Revenues $1,300,000$400,000 Interest Revenues $11,250 Dividend Revenue $15,000 Less: Expenses Miscellaneous Expense $864,000$259,200 Interest Expense $19,400 Income Tax Expense $198,000$48,000 Net Income $264,250$73,400\begin{array}{|l|r|r|}\hline & \text { PlaxInc. } & \text { Slate Corp } \\\hline \text { Miscellaneous Revenues } & \$ 1,300,000 & \$ 400,000 \\\hline \text { Interest Revenues } & \$ 11,250 & \\\hline \text { Dividend Revenue } & \$ 15,000 & \\\hline \text { Less: Expenses } & & \\\hline \text { Miscellaneous Expense } & \$ 864,000 & \$ 259,200 \\\hline \text { Interest Expense } & & \$ 19,400 \\\hline \text { Income Tax Expense } & \$ 198,000 & \$ 48,000 \\\hline \text { Net Income } & \$ 264,250 & \$ 73,400\\\hline\end{array} Miscellaneous Revenues Interest Revenues Dividend Revenue Less: Expenses Miscellaneous Expense Interest Expense Income Tax Expense Net Income PlaxInc. $1,300,000$11,250$15,000$864,000$198,000$264,250 Slate Corp $400,000$259,200$19,400$48,000$73,400 Retained Earnings Statements
Plax Inc. Slate Corp Balance, January 1, 2020 $490,000$180,000 Net Income $264,250$73,400 Less: Dividends $(126,000)($20,000) Retained Earnings $628,250$233,400\begin{array}{|l|r|r|}\hline & \text { Plax Inc. } & \text { Slate Corp } \\\hline \text { Balance, January 1, 2020 } & \$ 490,000 & \$ 180,000 \\\hline \text { Net Income } & \$ 264,250 & \$ 73,400 \\\hline \text { Less: Dividends } & \$(126,000) & (\$ 20,000) \\\hline \text { Retained Earnings } & \$ 628,250 & \$ 233,400\\\hline\end{array} Balance, January 1, 2020 Net Income Less: Dividends Retained Earnings Plax Inc. $490,000$264,250$(126,000)$628,250 Slate Corp $180,000$73,400($20,000)$233,400 Balance Sheets
Plax Inc. Slate Corp Miscellaneous Assets $1,210,000$745,200 Investment in Slate Shares $196,000 Investment in Slate Bonds $122,250 Total Assets $1,528,250$745,200 Miscellaneous Liabilities $600,000$150,000 Bonds Payable $200,000 Bond Premium $1,800 Common Shares $300,000$160,000 Retained Earnings $628,250$233,400 Total Liabilities and Equity $1,528,250$745,200\begin{array}{|l|r|r|}\hline & \text { Plax Inc. } & \text { Slate Corp } \\\hline \text { Miscellaneous Assets } & \$ 1,210,000 & \$ 745,200 \\\hline \text { Investment in Slate Shares } & \$ 196,000 & \\\hline \text { Investment in Slate Bonds } & \$ 122,250 & \\\hline \text { Total Assets } & \$ 1,528,250 & \$ 745,200 \\\hline \text { Miscellaneous Liabilities } & \$ 600,000 & \$ 150,000 \\\hline \text { Bonds Payable } & & \$ 200,000 \\\hline \text { Bond Premium } & & \$ 1,800 \\\hline \text { Common Shares } & \$ 300,000 & \$ 160,000 \\\hline \text { Retained Earnings } & \$ 628,250 & \$ 233,400 \\\hline \text { Total Liabilities and Equity } & \$ 1,528,250 & \$ 745,200\\\hline\end{array} Miscellaneous Assets Investment in Slate Shares Investment in Slate Bonds Total Assets Miscellaneous Liabilities Bonds Payable Bond Premium Common Shares Retained Earnings Total Liabilities and Equity Plax Inc. $1,210,000$196,000$122,250$1,528,250$600,000$300,000$628,250$1,528,250 Slate Corp $745,200$745,200$150,000$200,000$1,800$160,000$233,400$745,200 Other Information:
Plax acquired 75% of Slate on January 1, 2016 for $196,000, when Slate's retained earnings was $80,000 and the acquisition differential was attributable entirely to goodwill. There were impairment losses to the goodwill of $6,400 and $1,600 in 2017 and 2020, respectively.
Plax uses the cost method to account for its investment.
Slate has 10% par value bonds outstanding in the amount of $200,000 which mature on December 31, 2023. The bonds were issued at a premium. On January 1, 2020 the unamortized premium amounted to $2,400 Slate uses the straight line method to amortize the premium.
On January 1, 2020, Plax acquired $120,000 face value of Slate's bonds for $123,000 Plax also uses the straight line method to amortize any bond premium or discount.
Both companies are subject to a 40% tax rate.
Gains and losses from intercompany bond holdings are to be allocated to the two companies when consolidated financial statements are prepared.
Calculate the goodwill as at December 31, 2020.
Goodwill
An intangible asset representing the excess of purchase price over the fair market value of identifiable assets and liabilities acquired in a business combination.
Equity Method
An accounting technique used to record investments in other companies, where the investment is initially recorded at cost and adjusted thereafter for the proportionate share of profit or loss and dividends received.
Impairment Loss
A decrease in an asset's net carrying value that exceeds the future recoverable amount.
- Ascertain the initial recognition value of goodwill in a subsidiary purchase.
Verified Answer
SF
Steffi FernandesJun 28, 2024
Final Answer :
Cost of investment (75%)$196,000 Imputed purchase price: ($196,000/0.75)$261,333 Book value of net assets: $240,000 AD-allocated to Goodwill $21,333 Goodwill at acquisition: $21,333 Less: Impairment losses ($6,400+$1,600)($8,000) Goodwill as at December 31,2020$13,333\begin{array}{|l|r|}\hline \text { Cost of investment }(75 \%) & \$ 196,000 \\\hline \text { Imputed purchase price: }(\$ 196,000 / 0.75) & \$ 261,333 \\\hline \text { Book value of net assets: } & \$ 240,000 \\\hline \text { AD-allocated to Goodwill } & \$ 21,333 \\\hline \text { Goodwill at acquisition: } & \$ 21,333 \\\hline \text { Less: Impairment losses }(\$ 6,400+\$ 1,600) & (\$ 8,000) \\\hline \text { Goodwill as at December } 31,2020 & \$ 13,333 \\\hline\end{array} Cost of investment (75%) Imputed purchase price: ($196,000/0.75) Book value of net assets: AD-allocated to Goodwill Goodwill at acquisition: Less: Impairment losses ($6,400+$1,600) Goodwill as at December 31,2020$196,000$261,333$240,000$21,333$21,333($8,000)$13,333
Learning Objectives
- Ascertain the initial recognition value of goodwill in a subsidiary purchase.