Assuming that Davis purchases 100% of Martin for $300,000, answer the following:

Question

Davis Inc. purchased a controlling interest in Martin Inc. on January 1, 2015,
when Martin's common shares and retained earnings were carried at $180,000
and $60,000 respectively. On that date, Martin's book values approximated its
fair values, with the exception of the company's inventories and a Patent held by
Martin. The patent, which had an estimated remaining useful life of ten years,
had a fair value which was $20,000 higher than its book value. Martin's
Inventories on January 1, 2015 were estimated to have a fair value that was
$16,000 higher than their book value.
It was predicted that Martin's goodwill impairment test, which was to be
conducted on December 31, 2016, would result in a loss equal to 10% of the
goodwill (regardless of the amount) at the date of acquisition being recorded.
During 2015, Martin reported a net income of $60,000 and paid $12,000 in
dividends. Martin's 2016 net income and dividends were $72,000 and $15,000,
respectively. Martin uses straight-line amortization for all of its assets.

Required:
a) Prepare Davis' Equity Method journal entries for 2015 and 2016.
b) Compute the following as at December 31, 2016:
i. Investment in Martin Inc.
ii. Goodwill
iii. The amount of unamortized acquisition differential.

Answer 1

a) Equity Method Journal Entries



b)

i) Investment in Martin Inc.:



ii) Goodwill:



iii) The only unamortized acquisition differential remaining would be 8/10 of the excess fair value of the patent, which would be $16,000 plus the goodwill of $21,600 for a total of $37,600.