Equity Method Chapte 1 Comprehensive Problem page 24 STEP I ANALYZE PURCHASE PRICE Jan 1,2010 1 .

Purchase Price 70,000 2. Acquired 10% Book Value [CAR] 600,000 X 10% Excess 3. 10% Net difference between fair value and book value of net assets aquired-1 00,000 Excess 4. Goodwill-Plug STEP I ANALYZE PURCHASE PRICE Jan 1, 2011 1 . Purchase Price 264,000 2. Acquired 20% Book Value [CAR] 700,000 X 30% Excess 3. 30% Net difference between fair value and book value of net assets aquired-80,000 Excess 4. Goodwill-Plug

(60,000) 10,000

(210,000) 54,000

(10,000)

o o

(24,OOO) 30,000

(30,000)

STEP II ANALYSIS TRUE EARNINGS [Complete Equity Method] Gross Earnings 21 0,000 x 1 0% Purchase Price Adjustments Equipment- 100,000/5=20,000 x 1 0% True Earnings

21,000

STEP II ANALYSIS TRUE EARNINGS [Complete Equity Method] Gross Earnings-2011 100,000 250,000 x 40% Purchase Price Adjustments Equipment- 100,000/5=20,000 x 10%

(2,000) 19,000

o
True Earnings STEP III INVESTMENT ACCOUNT ANALYSIS B A Balance-beg Additions True Earnings Substraction Dividend 110,000 x 10% Balance-end 70,000

(2,000) (6,000) 92,000

STEP III INVESTMENT ACCOUNT ANALYSIS B A Balance-beg 78,000

19,000

(11,000) 78,000

Additions True Earnings Investment Sub straction S Dividend 100,000 x 40% Balance-end

23,400 264,000

(40,000) 394,000