Reference no: EM133059842

Question - On July 1, 20X1, your company, which has a December 31 year-end, purchased 200,000 shares of Lethbridge Ltd. at $33.90 per share. Commissions on the purchase amounted to $100,000. This friendly acquisition gives your company a 40% interest in Lethbridge and two seats on the board of directors of that company.

The balance sheet of Lethbridge on July 1, 20X1 showed that assets had a carrying amount of $40 million and that the liabilities had a carrying amount of $25 million. An appraisal of the Lethbridge's building stated the fair value of that asset, with a 16-year remaining life on July 1, 20X1, as $1,000,000 greater than the asset's carrying amount.

For the year ending December 31, 20X1 Lethbridge reported net income of $1,500,000. On December 4, 20X1, Lethbridge sold inventory to your company at a price of $160,000. Such a sale normally has a gross profit of 60% of the sales price. You have just checked and have determined that your company was still holding 80% of this inventory at the end of 20X1. Lethbridge declared and paid out its annual dividend to all shareholders of $375,000 on December 15, 20X1.

The Lethbridge board of directors asked you to investigate some unethical practices of the CEO. Consequently, the board asked the CEO to resign. Because of the turmoil this has caused, you believe that there is now an impairment in goodwill amounting to 25% of the initial goodwill value included in the purchase price of the shares of Lethbridge. Lethbridge incurs income tax at a rate of 30%.

Required -

1. Calculate the amount of goodwill included in the purchase price of these shares on July 1, 20X1.

2. Calculate the equity earnings that your company will record from this investment for the year ended December 31, 20X1.

3. Calculate the balance in the investment account for this associate at December 31, 20X1.