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On January 1, 2020, Archer, Incorporated, paid $100,000 for a 30% interest in Harley Corporation. This investee had assets with a book value of $550,000 and liabilities of $300,000. A patent held by Harley having a book value of $10,000 was actually worth $40,000 with a six-year remaining life. Any goodwill associated with this acquisition is considered to have an indefinite life. During 2020, Harley reported net income of $50,000 and paid dividends of $20,000 while in 2021 it reported net income of $75,000 and dividends of $30,000. Assume Archer has the ability to significantly influence the operations of Harley. The amount allocated to goodwill at January 1, 2020, is

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abiolataiwo2015

The amount allocated to goodwill at January 1, 2020, is $16,000.

Goodwill

First step

Book value purchased = (550,000 - 300,000) ×30%

Book value purchased= 250,000 ×30%

Book value purchased= 75,000

Excess=75,000 × 30%

Excess= 25,000

Second step

Allocated to patent= (40,000 - 10,000)×30%

Allocated to patent= 30,000×30%

Allocated to patent= 9,000

Third step

Goodwill = 25,000 - 9,000

Goodwill=$16,000

Therefore the amount allocated to goodwill at January 1, 2020, is $16,000.

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