Question

Franklin purchases 40 percent of Johnson Company on January 1 for $617,100. Although Franklin did not use it, this acquisition gave Franklin the ability to apply significant influence to Johnson’s operating and financing policies. Johnson reports assets on that date of $1,515,000 with liabilities of $548,000. One building with a seven-year remaining life is undervalued on Johnson’s books by $243,250. Also, Johnson’s book value for its trademark (10-year remaining life) is undervalued by $332,500. During the year, Johnson reports net income of $140,000 while declaring dividends of $70,000. What is the Investment in Johnson Company balance (equity method) in Franklin’s financial records as of December 31?

Answer 1

	Equity method
		Amount in $
	Investment on January 1	617,100
	Add: Investment Revenue ( 140,000 x 40% )	56,000
	Less: Building excess value annual amortization	13,929
	( 243,250 / 7 ) x 40%
	Less: Trademark excess value annual amortization	13,300
	(332,500 / 10 ) x 40%
	Less: Dividend ( 70,000 x 40% )	28,000
	Investment in Johnson Company as On December 31	617,871