On January 1, 2014, Ridge Road Company acquired 20 percent of the voting shares of Sauk Trail, Inc. for $3,200,000 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:
Carrying Amount Fair Value
Cash and receivables $ 135,000 $ 135,000
Computing equipment 5,225,000 6,100,000
Patented technology 125,000 4,050,000
Trademark 175,000 2,050,000
Liabilities (210,000 ) (210,000 )
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 four year remaining useful life. The trademark’s useful life was considered indefinite. Ridge Road attributed to goodwill any unidentified excess cost.
During the next two years, Sauk Trail reported the following net income and dividends:
Net Income Dividends Declared
2014 $ 1,850,000 $ 175,000
2015 2,035,000 185,000
a. How much of Ridge Road’s $3,200,000 payment for Sauk Trail is attributable to goodwill?
b. What amount should Ridge Road report for its equity in Sauk Trail’s earnings on its income statements for 2014 and 2015?
c. What amount should Ridge Road report for its investment in Sauk Trail on its balance sheets at the end of 2014 and 2015?
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