Question

Exercise 22-22 Incorrect answer. Your answer is incorrect. Try again.

On January 1, 2017, Buffalo Co. purchased 23,000 shares (a 10% interest) in Elton John Corp. for $1,510,000. At the time, the book value and the fair value of John’s net assets were $12,900,000.

On July 1, 2018, Buffalo paid $2,760,000 for 46,000 additional shares of John common stock, which represented a 20% investment in John. The fair value of John’s identifiable assets net of liabilities was equal to their carrying amount of $14,000,000. As a result of this transaction, Buffalo owns 30% of John and can exercise significant influence over John’s operating and financial policies. (Any excess fair value is attributed to goodwill.)

John reported the following net income and declared and paid the following dividends.

Net Income Dividend per Share

Year ended 12/31/17 $680,000 None

Six months ended 6/30/18 $520,000 None

Six months ended 12/31/18 $888,000 $1.50

Determine the ending balance that Buffalo Co. should report as its investment in John Corp. at the end of 2018.

Investment in Elton John Corp. $Enter the investment in Elton John Corp. in dollars

Entry field with incorrect answer 4,552,900

Answer 1

ANSWER:

Because Buffalo Co. now has a 30% interest in Elton John Corp. as of 7/1/18, it is necessary to first adjust the investment in Elton John to the equity method in prior periods. The following schedule provides this information:

	12/31/17	6/30/18
buffalo's equity in earnings of Elton John Corp.     (10%)	$68,000	$52,000
Dividends received	0	0
Adjustment	$68,000	$52,000

Under GAAP, goodwill is not amortized.

A computation of the ending balance in the investment account of Elton John Corp. can now be made as follows:

          Investment in Elton John Corp. 1/1/17   $1510000

          Additional purchase 7/1/18 2760000

          Adjustment for 2017 income (prior period)                                                                             68000

          Adjustment for 2018 income to 6/30 (prior period)                                                                 52000

          Income (7/1/18-12/31/18) $888,000 X 30%                                                                          266400

          Dividends (7/1/18-12/31/18) $1.50 X 69,000 shares                                                            (103500)

          Investment in Elton John Corp. 12/31/18 $4552900