P2-1

Computations for interim purchase (investee has a discontinued operations loss)

Kuma Cooperation paid $600,000 in cash for a 40 percent interest in Sachi Corporation
on April 1, 2016, when Sachi’s common stock was at $1,000,000 and the book value of
its net assets equaled fair value. During 2016, Sachi declared and paid dividends of
$30,000 each quarter on March 1, June 1, September 1, and December 1. Sachi’s net
income in 2016 was reported as follows:
Income from continuing operations $250,000
Loss: Loss of discontinued operations (50,000)
Net income $200,000
REQUIRED : Determine the following items for Kuma:
1. Goodwill or gains on the bargain purchase
2. Income from Sachi for 2016
3. Investment in Sachi account balance at December 31, 2016
4. Kuma’s equity in Sachi’s net assets at December 31, 2016
5. That amount of discontinued operations loss that Kuma will show on December
31, 2016
Answer :
1. Investment Cost 40% $600,000
Investment Cost 100% ($600,000/40%) $1,500,000
Common Stock: ($1,000,000)
Goodwill 100%: $500,000
Goodwill 40%: (40% x $500,000) $200,000

2. Net Income from Sachi 2016: (40% x $200,000) x 9/12 $60,000

3. Original Investment April 1 2016 $600,000

40% of Sachi’s Net Income for 2016(200,000 x 40%) $60,000
Deduct:
40% of Dividend in 1 June, 1 September and 1 December $36,000
Investment Sachi Account Balance $624,000
4. Book Value: (($1,110,000) + $600,000) x 40%) $684,000
*book value of net assets equals fair value.
*(Total Stockholder’s Equity $1,000,000+200,000-90,000 = $1,110,000)

5. Loss of discontinued operations $50,000

Percent Owned: 40%
Discontinued operations loss: $20,000