On January 1,2007,Firewire Company acquired 40 percent of Browser Company's common stock.For this acquisition,Firewire paid $45,000 above book value.The full differential was attributed to equipment with a remaining life of ten years and zero salvage value at the date of acquisition.During 2007 and 2008,Browser reported net income of $90,000 and $50,000 and paid dividends of $40,000 and $60,000,respectively.Firewire reported a balance in its investment account of $230,000 on December 31,2008.It uses the equity method in accounting for this investment.
-Based on the information provided,what would be the amount paid by Firewire for this acquisition?

Question

Quizplus · Accepted Answer

Firewire paid $45,000 above book value for the acquisition. Since no other information is given about the book value of Browser Company, we cannot determine the exact amount paid by Firewire. However, we know that the differential of $45,000 was fully attributed to equipment with a remaining life of ten years and zero salvage value. This means that Firewire paid $45,000 for the equipment. Therefore, the amount paid by Firewire for the acquisition is the sum of the equipment value and the book value of the 40% of Browser Company's common stock: 
Amount paid = $45,000 + (0.4 x book value of Browser Company's common stock)
We do not know the book value of Browser Company's common stock, but we can solve for it since we have the balance in Firewire's investment account at the end of 2008: 
Balance in investment account = 0.4 x Book value of Browser Company's common stock + (0.4 x Net income) - (0.4 x Dividends)
$230,000 = 0.4 x Book value of Browser Company's common stock + (0.4 x $90,000) - (0.4 x $40,000)
$230,000 = 0.4 x Book value of Browser Company's common stock + $20,000
0.4 x Book value of Browser Company's common stock = $210,000
Book value of Browser Company's common stock = $525,000
Therefore, the amount paid by Firewire for the acquisition is: 
Amount paid = $45,000 + (0.4 x $525,000) = $223,000

On January 1,2007,Firewire Company Acquired 40 Percent of Browser Company's