On January 1, 2010, Dawson, Incorporated, paid $100,000 for a 30% interest in Sacco Corporation. This investee had assets with a book value of $550,000 and liabilities of $300,000. A patent held by Sacco having a book value of $10,000 was actually worth $40,000 with a six year remaining life. Any goodwill associated with this acquisition is considered to have an indefinite life. During 2010, Sacco reported income of $50,000 and paid dividends of $20,000 while in 2011 it reported income of $75,000 and dividends of $30,000. Assume Dawson has the ability to significantly influence the operations of Sacco. The amount allocated to goodwill at January 1, 2010, is

Question

Quizplus · Accepted Answer

Step 1: Calculate the fair value of the investee's identifiable net assets as of January 1, 2010:
Total assets = $550,000
Total liabilities = -$300,000
Net assets = $250,000
Fair value of net assets = $250,000 + 0.3($40,000 - $10,000) = $268,000
Step 2: Calculate the amount allocated to goodwill:
Cost of investment = $100,000
Fair value of net assets = -$268,000
Goodwill = $100,000 - $268,000 = -$168,000
Since the goodwill is considered to have an indefinite life, it cannot be amortized and the full amount is allocated to the investment account. Therefore, the amount allocated to goodwill is $16,000 ($168,000 x 0.3).

On January 1, 2010, Dawson, Incorporated, Paid $100,000 for a 30