Questions 1-5 are all based on the following information. On January 2, 2014, Max Corporation acquired 30 percent of the outstanding common stock of Rich Company for $1,000,000. This acquisition gave Max the ability to exercise significant influence over the investee. The book value of the acquired shares was $790,000. Any excess cost over the book value was assigned to a patent that was undervalued on Rich\'s balance sheet. This patent has a remaining useful life of 7 years. For the year ended December 31, 2014, Rich reported net income of $250,000 and paid cash dividends of $95,000. 1)At December 31, 2014, how much is the basic equity accrual (increase)? 2)How much is the excess payment? 3)At December 31, 2014, how much is the dividend allocation? 4)For 2014, how much is the excess amortization of the patent? 5)At December 31, 2014, how much should Max report as its investment in Rich? Solution 1) Basic equity accrual on 31/12/2014 155,000/- 2) The xecess payment for patent 210,000/- 3) Dividend allocation 95,000/- 4) Excess amortisation of patent 28,500/- (95,000 *30 %) 5) Max investment in rich after dividend is accounted 971,500/- (1,000,000 - 28,500).

1. Questions 11-15 are based on the following:
Rose Corporation acquired 100 percent of Lilly Company’s outstanding common stock on
January 1, for $880,000 in cash. Lilly reported net assets with a carrying amount of $560,000 at
that time. Some of Lilly’s assets had fair values that differed from book values as follows:
Book
Values
Fair
Values
Trademarks (indefinite life)
$
96,000
$
256,000
Customer relationships (5-year life)
0
120,000
Equipment (10-year life)
547,200
499,200
Rose computed income from Lilly using the Equity Method.
Following are financial statements at the end of the first year for these two companies prepared
from their separately maintained accounting systems. Credit balances are indicated by
parentheses.
Rose
Lilly
Revenues
$
(1,800,000)
$
(832,000)
Cost of goods sold
480,000
364,800

2. Depreciation expense
120,000
112,000
Amortization expense
40,000
0
Income from Lilly
(336,000)
0
Net income
$
(1,496,000)
$
(355,200)
Retained earnings 1/1
$
(1,120,000)
$
(400,000)
Net income
(1,496,000)
(355,200)
Dividends paid
227,200
128,000
Retained earnings 12/31
$
(2,388,800)
$
(627,200)
Cash
$
296,000

3. $
168,000
Receivables
360,000
89,600
Inventory
280,000
216,000
Investment in Lilly
1,088,000
0
Trademarks
758,400
96,000
Customer relationships
0
0
Equipment (net)
1,480,000
435,200
Goodwill
0
0
Total assets
$
4,262,400
$
1,004,800
Liabilities
$
(1,233,600)
$
(217,600)
Common stock

4. (640,000)
(160,000)
Retained earnings 12/31
(2,388,800)
(627,200)
Total liabilities and equity
$
(4,262,400)
$
(1,004,800)
1)Determine the amount of Amortization Expense to be reported for this business combination
for the year ending December 31.
2)Determine the amount of Depreciation Expense to be reported for this business combination
for the year ending December 31.
3)Determine the amount of Income from Lilly to be reported for this business combination for
the year ending December 31.
4)Determine the amount of Dividends Paid to be reported for this business combination for the
year ending December 31.
5)Determine the amount of Reatained Earnings to be reported for this business combination at
December 31.
Rose Corporation acquired 100 percent of Lilly Company’s outstanding common stock on
January 1, for $880,000 in cash. Lilly reported net assets with a carrying amount of $560,000 at
that time. Some of Lilly’s assets had fair values that differed from book values as follows:
Solution
1.Amount of amortisation expense $40000
2.Amount of depreciation $232000
(120000+112000)
3.Amount of income from lilly $(336000)
4.Amount of dividend paid $355200
($227200+128000)
5.Amount of Reatined earnings $3508800
($1120000+2388800)