On January 4, 2013, Bailey Corp. purchased 40% of the voting common stock of Emery Co., paying $3,000,000. Bailey properly accounts for this investment using the equity method. At the time of the investment, Emery's total stockholders' equity was $5,000,000. Bailey gathered the following information about Emery's assets and liabilities whose book values and fair values differed: $\begin{array}{lrr}&\text { Book Value }&\text { Fair Value }\
\text { Buildings (20-year life) } & \$ 1,000,000 & \$ 1,800,000 \
\text { Equipment (5-year life) } & 1,500,000 & 2,000,000 \
\text { Franchises (10-year life) } & 0 & 700,000
\end{array}$ Any excess of cost over fair value was attributed to goodwill, which has not been impaired. Emery Co. reported net income of $400,000 for 2013, and paid dividends of $200,000 during that year. What is the amount of excess amortization expense for Bailey's investment in Emery for the first year?

Question

Quizplus · Accepted Answer

The excess amortization expense is calculated based on the difference between the fair value and book value of the identifiable assets. For buildings, the excess is $800,000 with a 20-year life, resulting in $40,000 per year. For equipment, the excess is $500,000 with a 5-year life, resulting in $100,000 per year. Franchises have an excess of $700,000 with a 10-year life, resulting in $70,000 per year. The total excess is $210,000, and Bailey's share (40%) is $84,000.

On January 4, 2013, Bailey Corp Any Excess of Cost Over Fair Value Was Attributed to Voting