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    Journalize long term investments in stock-equity method

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    On January 1,2008,Compustat Co.bought 30% of the outstanding common stock of Freelance Corp. for $258,000 cash. Compustat Co. accounts for this investment by the equity method. At the date of acquisition of the stock, Freelance Corp. 's net assets had a carrying value of $590,000. Assets with an average remaining life of five years have a current market value that is $130,000 in excess of their carrying values. The remaining difference between the purchase price and the value of the underlying stockholders' equity cannot be attributed to any identifiable tangible or intangible asset. Accordingly, the remaining difference is allocated to goodwill. At the end of 2008, Freelance Corp. reports net income of $180,000. During 2008, Freelance Corp. declared and paid cash dividends of $20,000.
    Give the entries necessary to reflect Compustat Co.'s investment in Freelance Corp. for 2008.

    See attached file for chart to fill out.

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    Solution Preview

    The calculations are:

    The acquisition price is $258,000
    Net assets 590,000 X 30% = 177,000
    Excess payment done = 81,000
    Value of one asset in excess of book value 130,000 X 30% = $39,000
    Goodwill = 81,000-39,000 = $42,000
    Goodwill is ...

    Solution Summary

    The solution explains the journal entries for long term investments in stock-equity method.