Giant Inc. acquires 10% of Small Corporation on January 1, 2010, for $90,000 when the book value of Small was $800,000. On that date, Small Corporation had a patent that was undervalued in its books by $100,000 with a useful life of 10 years. During 2010 Small reported net income of $125,000 and declared and paid dividends of $30,000. The company classifies the investment as available for sale securities. During 2011, Small earned net income of $100,000 and declared and paid dividends of $20,000. On January 1, 2012, Giant purchased an additional 20% of Small for $325,000, giving Giant the ability to significantly influence the operating policies of Small. On that date, a patent with a useful life of 8 years was undervalued by $110,000. During 2012, Small, reported net income of $150,000 and declared and paid dividends of $30,000. Required: 1. Prepare a schedule showing the allocation of the consideration transferred in relation to the acquisition made on January 1, 2012. 2. Prepare the necessary journal entry(ies) for the year 2012? 3. Calculate the balance of the Investment in Small account that would be reported in Giant’s Balance Sheet at December 31, 2012.
Giant Inc. acquires 10% of Small Corporation on January 1, 2010, for $90,000 when the book value of Small was $800,000. On that date, Small Corporation had a patent that was undervalued in its books by $100,000 with a useful life of 10 years. During 2010 Small reported net income of $125,000 and declared and paid dividends of $30,000. The company classifies the investment as available for sale securities. During 2011, Small earned net income of $100,000 and declared and paid dividends of $20,000. On January 1, 2012, Giant purchased an additional 20% of Small for $325,000, giving Giant the ability to significantly influence the operating policies of Small. On that date, a patent with a useful life of 8 years was undervalued by $110,000. During 2012, Small, reported net income of $150,000 and declared and paid dividends of $30,000. Required: 1. Prepare a schedule showing the allocation of the consideration transferred in relation to the acquisition made on January 1, 2012. 2. Prepare the necessary journal entry(ies) for the year 2012? 3. Calculate the balance of the Investment in Small account that would be reported in Giant’s Balance Sheet at December 31, 2012.
Chapter20: Financing With Derivatives
Section: Chapter Questions
Problem 7P
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Question
Giant Inc. acquires 10% of Small Corporation on January 1, 2010, for $90,000 when the book value
of Small was $800,000. On that date, Small Corporation had a patent that was undervalued in its
books by $100,000 with a useful life of 10 years.
During 2010 Small reported net income of $125,000 and declared and paid dividends of $30,000.
The company classifies the investment as available for sale securities. During 2011, Small earned
net income of $100,000 and declared and paid dividends of $20,000.
On January 1, 2012, Giant purchased an additional 20% of Small for $325,000, giving Giant the
ability to significantly influence the operating policies of Small. On that date, a patent with a
useful life of 8 years was undervalued by $110,000. During 2012, Small, reported net income of
$150,000 and declared and paid dividends of $30,000.
Required:
1. Prepare a schedule showing the allocation of the consideration transferred in relation to
the acquisition made on January 1, 2012.
2. Prepare the necessary journal entry (ies) for the year 2012?
3. Calculate the balance of the Investment in Small account that would be reported in
Giant’s Balance Sheet at December 31, 2012.
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