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19 April, 09:40

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:

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  1. 19 April, 10:23
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    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.
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