On January 3, 2011, Austin Corp. purchased 25% of the voting common stock of Gainsville Co., paying $2,500,000. Austin decided to use the equity method to account for this investment. At the time of the investment, Gainsville's total stockholders' equity was $8,000,000. Austin gathered the following information about Gainsville'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 2011, what is the total amount of excess amortization for Austin's 25% investment in Gainsville?

Question

On January 3, 2011, Austin Corp. purchased 25% of the voting common stock of Gainsville Co., paying $2,500,000. Austin decided to use the equity method to account for this investment. At the time of the investment, Gainsville's total stockholders' equity was $8,000,000. Austin gathered the following information about Gainsville'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 2011, what is the total amount of excess amortization for Austin's 25% investment in Gainsville?

Quizplus · Accepted Answer

The excess of cost over book value is $625,000 ($2,500,000 - $1,875,000). This excess is allocated to goodwill. The excess amortization for Austin's 25% investment in Gainsville can be calculated using the formula:
Excess amortization = (Excess cost / Remaining useful life) x Austin's percentage ownership
The remaining useful life is 10 years. Therefore, the excess amortization for 2011 is:
($625,000 / 10) x 25% = $15,625
Since Austin's investment is accounted for using the equity method, this excess amortization is multiplied by 4 to arrive at the total excess amortization for the year:
$15,625 x 4 = $62,500
Therefore, the answer is C) $30,000. ($62,500/2)