On January 3, 2021, Madison Corp. purchased 30% of the voting common stock of Huntsville Co., paying $3,000,000. Madison decided to use the equity method to account for this investment. At the time of the investment, Huntsville's total stockholders' equity was $8,000,000. Madison gathered the following information about Huntsville's assets and liabilities: For all other assets and liabilities, book value and fair value were equal. Any excess of cost over fair value was attributed to goodwill, which has not been impaired.For 2021, what is the total amount of excess amortization for Madison's 30% investment in Huntsville?

Question

On January 3, 2021, Madison Corp. purchased 30% of the voting common stock of Huntsville Co., paying $3,000,000. Madison decided to use the equity method to account for this investment. At the time of the investment, Huntsville's total stockholders' equity was $8,000,000. Madison gathered the following information about Huntsville's assets and liabilities:  For all other assets and liabilities, book value and fair value were equal. Any excess of cost over fair value was attributed to goodwill, which has not been impaired.For 2021, what is the total amount of excess amortization for Madison's 30% investment in Huntsville?

Quizplus · Accepted Answer

Madison Corp. purchased 30% of Huntsville Co. for $3,000,000. Since the equity method is being used, Madison will make adjustments to the investment account on its balance sheet to reflect its share of Huntsville's net income and dividends.

To calculate excess amortization, we need to first compute the fair value of Huntsville's net identifiable assets. From the given information, the net identifiable assets have a fair value of $9,000,000 ($5,000,000 + $4,000,000). Madison's share of Huntsville's net identifiable assets is:

$9,000,000 × 30% = $2,700,000

Madison paid $3,000,000 for its 30% investment, which is $300,000 more than its share of the fair value of Huntsville's net identifiable assets. This excess is attributed to goodwill ($300,000) and it will be amortized over the estimated useful life of the goodwill.

Let's assume that the useful life of the goodwill is 10 years. The annual amortization of the goodwill is:

$300,000 ÷ 10 = $30,000

Since Madison owns 30% of Huntsville, its share of the excess amortization is:

$30,000 × 30% = $9,000

However, the excess amortization is not recognized in the current year. Instead, the excess is included in an unamortized goodwill account on Madison's balance sheet. In subsequent years, the unamortized goodwill will be reduced by the amount of excess amortization recognized each year.

Therefore, the total amount of excess amortization for Madison's 30% investment in Huntsville for 2021 is:

$9,000 × 4 (since the goodwill was acquired on January 3) = $36,000

Thus, the correct answer is (A) $36,000.