Question

Adrianna Company purchases 35% of Saddle Company's outstanding stock for $450,000. At the time of acquisition, book value of the company's net assets is $1 million and the fair value of the company's net assets is $1.2 million. The difference between the book value and fair value of the net assets is attributed to undervalued land. Adrianna should

Answer 1

Answer:

The investment must be recorded using the equity method:

Dr Investment in Saddle company 450,000

    Cr Cash 450,000

Even though the difference between historic cost and fair market value of the land is very significant, Adriana company cannot make any adjustments or amortizations to the investment account because land is a non-depreciable asset that must always be recorded at purchase cost. Any gain or loss can only be calculated after the land is sold, but meantime no adjustment is necessary.