Reference no: EM133127837
Question - Big Company wants to acquire 25% of Little Company. Little Company has balance sheet assets of $500,000 and liabilities of $300,000 for a net book value of $200,000. Big Company determines that Little Company has buildings that are undervalued by $120,000. Adding this to the net book value of $200,000, Big determines that the company is worth $320,000 and offers $80,000 (25% of $320,000) for a quarter share of the company.
Note that if, instead, Big Company offered $100,000 for the shares, there would be $20,000 of goodwill associated with the transaction ($100,000 minus the net worth of $80,000, as calculated above).
Assume in the above example that Little Company has net income of $50,000 in the first year after Big Company's acquisition and pays $10,000 of dividends. The useful life of the building is 20 years. If Big Company paid $80,000 for its 25% share of Little Company, the journal entries to record the investment during this year are as follows:
How would the entries change if Big had instead paid $100,000 for a 25% share of Little?
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