Franklin purchases 40 percent of Johnson Company on January 1 for $576,700. Although Franklin did not use it, this acquisition gave Franklin the abilityto apply significant influence to Johnson's operating and financing policies. Johnson reports assets on that date of $1,484,000 with liabilities of$544,000. One building with a seven-year remaining life is undervalued on Johnson's books by $229,250. Also, Johnson's book value for its trademark(10-year remaining life) is undervalued by $272,500. During the year, Johnson reports net income of $137,000 while declaring dividends of $80,000.What is the Investment in Johnson Company balance (equity method) in Franklin's financial records as of December 31?Multiple Choice$575,500.$588,600.$599,500.$630,300.< Prev5 of 25Next >

The objective of the question is to calculate the Investment in Johnson Company balance (equity method) in Franklin's financial records as of December 31.First, we need to calculate the excess of cost over book value. The cost of the investment is $576,700. The book value of Johnson's net assets is the difference between its total assets and total liabilities, which is $1,484,000 - $544,000 = $940,000. Franklin's share of the book value is 40% of $940,000, which is $376,000. The excess of cost over book value is $576,700 - $376,000 = $200,700.Next, we need to allocate the excess to the undervalued assets. The building is undervalued by $229,250 and the trademark is undervalued by $272,500. Franklin's share of the undervaluation is 40% of ($229,250 + $272,500), which is $200,700. This is equal to the excess of cost over book value, so all of the excess is allocated to these assets.Then, we need to calculate the amortization of the excess. The building has a remaining life of 7 years, so the annual amortization is $229,250 / 7 = $32,750. The trademark has a remaining life of 10 years, so the annual amortization is $272,500 / 10 = $27,250. Franklin's share of the amortization is 40% of ($32,750 + $27,250), which is $24,000.Finally, we need to calculate the Investment in Johnson Company balance. Franklin's share of Johnson's net income is 40% of $137,000, which is $54,800. The dividends received reduce the investment balance by 40% of $80,000, which is $32,000. The amortization of the excess reduces the investment balance by $24,000. Therefore, the Investment in Johnson Company balance is $576,700 + $54,800 - $32,000 - $24,000 = $575,500.The Investment in Johnson Company balance (equity method) in Franklin's financial records as of December 31 is $575,500. This is calculated by adding Franklin's share of Johnson's net income and subtracting the dividends received and the amortization of the excess of cost over book value.