Reference no: EM132771909

Hot Inc. owns 60% of Cold Inc, which it purchased on January 1, 2019 for $540,000. On that date, Cold's retained earnings and common shares were valued at $100,000 and $250,000, respectively. Cold's book values approximated its fair values on that date, with the exception of the company's inventory and a patent identified on acquisition. The patent had an estimated useful life of 10 years from the date of acquisition. The inventory had a book value that was $10,000 in excess of its fair value, while the patent had a fair value of $50,000. Hot uses the equity method to account for its investment in Cold Inc. The inventory on hand on the acquisition date was sold to outside parties during the year.

• Hot Inc. sold depreciable assets to Cold on January 1, 2019, at a loss of $15,000. On January 1, 2020, Cold sold depreciable assets to Hot at a gain of $10,000. Both assets had a remaining useful life of 5 years on the date of their intercompany sale.
• During 2019, Cold sold inventory to Hot in the amount of $18,000. This inventory was sold to outside parties during 2020. During 2020, Hot sold inventory to Cold for $45,000. One third of this inventory was still in Cold's warehouse on December 31, 2020. All sales (both internal and external) are priced to provide the seller with a mark-up of 50% above cost.

Cold's Net Income and Dividends for 2019 and 2020 are shown below.

                                   2019            2020

Net Income        $180,000        $200,000

Dividends            $ 20,000          $ 60,000

Both companies are subject to a tax rate of 20%.

Problem 1: Compute the goodwill on the acquisition date.