On January 1, 2020, Barber Corp. paid $1,160,000 to acquire Thompson Co. Thompson maintained separate incorporation. Barber used the equity method to account for the investment. The following information is available for Thompson's assets, liabilities, and stockholders' equity accounts on January 1, 2020: Thompson earned net income for 2020 of $134,000 and paid dividends of $51,000 during the year.The 2020 total excess amortization of fair-value allocations is calculated to be

Question

On January 1, 2020, Barber Corp. paid $1,160,000 to acquire Thompson Co. Thompson maintained separate incorporation. Barber used the equity method to account for the investment. The following information is available for Thompson's assets, liabilities, and stockholders' equity accounts on January 1, 2020:  Thompson earned net income for 2020 of $134,000 and paid dividends of $51,000 during the year.The 2020 total excess amortization of fair-value allocations is calculated to be

Quizplus · Accepted Answer

To calculate the excess amortization of fair-value allocations, we need to compare the fair value of Thompson's identifiable assets and liabilities at the acquisition date with their carrying amounts. Based on the information provided, we do not know the fair value of Thompson's identifiable assets and liabilities. Therefore, we cannot calculate the exact amount of excess amortization.

However, we can use the given information to eliminate some answer choices. The excess amortization of fair-value allocations arises when the cost of the investment exceeds the fair value of identifiable assets and liabilities. If the cost equals the fair value, there is no excess. And if the fair value exceeds the cost, the excess is negative, meaning that the investor has acquired a bargain.

In this case, Barber paid $1,160,000 to acquire Thompson, and we do not know the fair value of the assets and liabilities. Therefore, we cannot determine whether there is a bargain purchase or excess. However, we can compare the cost of the investment to the carrying amount of Thompson's net assets:

Cost of investment = $1,160,000
Carrying amount of net assets = ($880,000 + $520,000 − $240,000) = $1,160,000

Since the cost equals the carrying amount, there is no excess or bargain purchase. Therefore, the excess amortization of fair-value allocations is zero, and the answer is B ($900).