On December 31,20X2,the Esther Company Purchased 80% of the Outstanding

question 5

Essay

On December 31,20X2,the Esther Company purchased 80% of the outstanding common shares of the Jane Company for $7.5 million in cash.On that date,the shareholders' equity of Jane totalled $6 million and consisted of $1 million in no par common shares and $5 million in retained earnings.Both companies use the straight-line method to calculate depreciation and amortization.Goodwill,if any arises as a result of this business combination,is written down if there is a permanent impairment in its value.
For the year ending December 31,20X4,the statements of comprehensive income for Esther and Jane
At December 31,20X4,the condensed statement of financial position for the two companies were as follows:
OTHER INFORMATION:
1.On December 31,20X2,Jane had a building with a fair value that was $450,000 greater than its carrying value.The building had an estimated remaining useful life of 15 years.
2.On December 31,20X2,Jane had inventory with a fair value that was $150,000 less than its carrying value.This inventory was sold in 20X3.
3.During 20X3,Jane sold merchandise to Esther for $100,000,a price that included a gross profit of $50,000.During 20X3,40% of this merchandise was resold by Esther and the other 60% remained in its December 31,20X3 inventories.On December 31,20X4,the inventories of Esther contained merchandise purchased from Jane on which Jane had recognized a gross profit in the amount of $20,000.Total sales from Jane to Esther were $150,000 during 20X4.
4.During 20X4,Esther declared and paid dividends of $300,000 while Jane declared and paid dividends of $100,000.
5.Esther accounts for its investment in Jane using the cost method.
Required:
Calculate goodwill on the consolidated balance sheet at December 31,20X4 under the entity method and the parent-company extension method.Explain the differences between the two balances.

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Definitions:

Underallocation Of Resources

A situation where resources are not optimally distributed, often leading to inefficiencies and missed opportunities in the market.

Purely Competitive

A market structure characterized by many buyers and sellers, homogeneous products, and the freedom of entry and exit, resulting in firms being price takers.

Marginal Cost

The additional cost incurred by producing one more unit of a product, a crucial concept in economics for determining optimal production levels.

Transformative Effects

Significant changes or impacts that alter the structure or functioning of a system, society, or economy.