Question

Franklin purchases 40 percent of Johnson Company on January 1 for $616,400. Although Franklin did not use it, this acquisition gave Franklin the ability to apply significant influence to Johnson’s operating and financing policies. Johnson reports assets on that date of $1,498,000 with liabilities of $523,000. One building with a seven-year remaining life life is undervalued on Johnson’s books by $283,500. Also, Johnson’s book value for its trademark (10-year life) is undervalued by $282,500. During the year, Johnson reports net income of $151,000 while declaring dividends of $80,000. What is the Investment in Johnson Company balance (equity method) in Franklin’s financial records as of December 31?

Answer 1

$617,300

Step-by-step explanation:

Share of depreciation on building:

= (Undervalued amount ÷ Remaining life) × 40%

= ($283,500 ÷ 7 years) × 40%

= $16,200

This amount will be deducted from the investment.

Share of Trademark amortization:

= (Undervalued amount ÷ Remaining life) × 40%

= ($282,500 ÷ 10 years) × 40%

= $11,300

This amount will be deducted from the investment.

Share of net income = Net income × 40%

= $151,000 × 40%

= $60,400

Share of dividends = Dividend declared × 40%

= $80,000 × 40%

= $32,000

Therefore,

Investment to be reported at 31st December:

= Investment made + Share of net income - Share of dividends - Share of depreciation on building - Share of Trademark amortization

= $616,400 + $60,400 - $32,000 - $16,200 - $11,300

= $617,300