On January 1, 2017, Ridge Road Company acquired 25 percent of the voting shares of Sauk Trail, Inc., for $4,200,000 in cash. Both companies provide commercial Internet support services but serve markets in different industries. Ridge Road made the investment to gain access to Sauk Trail's board of directors and thus facilitate future cooperative agreements between the two firms. Ridge Road quickly obtained several seats on Sauk Trail's board which gave it the ability to significantly influence Sauk Trail's operating and investing activities. The January 1, 2017, carrying amounts and corresponding fair values for Sauk Trail's assets and liabilities follow: Carrying Amount Fair Value Cash and receivables $ 185,000 $ 185,000 Computing equipment 5,675,000 6,900,000 Patented technology 175,000 4,150,000 Trademark 225,000 2,150,000 Liabilities (260,000 ) (260,000 ) Also as of January 1, 2017, Sauk Trail's computing equipment had a seven-year remaining estimated useful life. The patented technology was estimated to have a three-year remaining useful life. The trademark's useful life was considered indefinite. Ridge Road attributed to goodwill any unidentified excess cost. During the next two years, Sauk Trail reported the following net income and dividends: Net Income Dividends Declared 2017 $ 1,950,000 $ 225,000 2018 2,135,000 235,000 How much of Ridge Road's $4,200,000 payment for Sauk Trail is attributable to goodwill? What amount should Ridge Road report for its equity in Sauk Trail's earnings on its income statements for 2017 and 2018? What amount should Ridge Road report for its investment in Sauk Trail on its balance sheets at the end of 2017 and 2018?
Reporting Cash Flows
Reporting of cash flows means a statement of cash flow which is a financial statement. A cash flow statement is prepared by gathering all the data regarding inflows and outflows of a company. The cash flow statement includes cash inflows and outflows from various activities such as operating, financing, and investment. Reporting this statement is important because it is the main financial statement of the company.
Balance Sheet
A balance sheet is an integral part of the set of financial statements of an organization that reports the assets, liabilities, equity (shareholding) capital, other short and long-term debts, along with other related items. A balance sheet is one of the most critical measures of the financial performance and position of the company, and as the name suggests, the statement must balance the assets against the liabilities and equity. The assets are what the company owns, and the liabilities represent what the company owes. Equity represents the amount invested in the business, either by the promoters of the company or by external shareholders. The total assets must match total liabilities plus equity.
Financial Statements
Financial statements are written records of an organization which provide a true and real picture of business activities. It shows the financial position and the operating performance of the company. It is prepared at the end of every financial cycle. It includes three main components that are balance sheet, income statement and cash flow statement.
Owner's Capital
Before we begin to understand what Owner’s capital is and what Equity financing is to an organization, it is important to understand some basic accounting terminologies. A double-entry bookkeeping system Normal account balances are those which are expected to have either a debit balance or a credit balance, depending on the nature of the account. An asset account will have a debit balance as normal balance because an asset is a debit account. Similarly, a liability account will have the normal balance as a credit balance because it is amount owed, representing a credit account. Equity is also said to have a credit balance as its normal balance. However, sometimes the normal balances may be reversed, often due to incorrect journal or posting entries or other accounting/ clerical errors.
Item 2
Item 2 5 points
On January 1, 2017, Ridge Road Company acquired 25 percent of the voting shares of Sauk Trail, Inc., for $4,200,000 in cash. Both companies provide commercial Internet support services but serve markets in different industries. Ridge Road made the investment to gain access to Sauk Trail's board of directors and thus facilitate future cooperative agreements between the two firms. Ridge Road quickly obtained several seats on Sauk Trail's board which gave it the ability to significantly influence Sauk Trail's operating and investing activities.
The January 1, 2017, carrying amounts and corresponding fair values for Sauk Trail's assets and liabilities follow:
| Carrying Amount | Fair Value | |||||
| Cash and receivables | $ | 185,000 | $ | 185,000 | ||
| Computing equipment | 5,675,000 | 6,900,000 | ||||
| Patented technology | 175,000 | 4,150,000 | ||||
| Trademark | 225,000 | 2,150,000 | ||||
| Liabilities | (260,000 | ) | (260,000 | ) | ||
Also as of January 1, 2017, Sauk Trail's computing equipment had a seven-year remaining estimated useful life. The patented technology was estimated to have a three-year remaining useful life. The trademark's useful life was considered indefinite. Ridge Road attributed to
During the next two years, Sauk Trail reported the following net income and dividends:
| Net Income | Dividends Declared | |||
| 2017 | $ | 1,950,000 | $ | 225,000 |
| 2018 | 2,135,000 | 235,000 | ||
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How much of Ridge Road's $4,200,000 payment for Sauk Trail is attributable to goodwill?
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What amount should Ridge Road report for its equity in Sauk Trail's earnings on its income statements for 2017 and 2018?
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What amount should Ridge Road report for its investment in Sauk Trail on its
balance sheets at the end of 2017 and 2018?
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