Question

Fizzy Corporation uses the equity method to account for its 25% investment in Organic Juices Company, for which it paid $10 million in excess of its share of Organic Juices' book value five years ago. In 2020 Organic Juices reports net income of $2 million, and Fizzy reports equity in net income from Organic Juices on its 2020 income statement in the amount of $500,000. We can determine from this information that Fizzy attributed the $10 million extra it paid for Organic Juices to any of the following except:

Answer 1

Answer:

a. Favorable leaseholds with an 8-year life

Options:

b. Technology rights with a 3-year life

c. Bottler franchise rights with indefinite life

d. Goodwill

Explanation:

We should notice the income recognize is the 25% of the company's income thus, there is no depreciation nor amortization.

a. Favorable leaseholds with an 8-year life

A favorable leaseholds because the market rate changes when performing the acquisition of the 25% would make for this but, will be amortized over an 8 years spawn Hence is guaranteed to not the cause of the 10,000,000 extra as it should decrease the income of 500,000 which is not what happened.

b.- and intangible which isn't recognize in the company's firm can also generate this difference and be eliminate after 3-years thus is a viable option

c.- the franchise right will still be there but, the valuation of them can change. The franchise while it is indefinite It can lose their market value (imagine a franchise of candels after electricity is invented) Thus, it could be or not.

d.- The goodwill could be checked for imparment and eliminated before the 5 years period or not require a journal entry that year.