Question

On January 1, 2017, Alison, Inc., paid $70,500 for a 40 percent interest in Holister Corporation’s common stock. This investee had assets with a book value of $224,500 and liabilities of $96,500. A patent held by Holister having a $13,300 book value was actually worth $41,800. This patent had a six-year remaining life. Any further excess cost associated with this acquisition was attributed to goodwill. During 2017, Holister earned income of $51,500 and declared and paid dividends of $17,000. In 2018, it had income of $70,500 and dividends of $22,000. During 2018, the fair value of Allison’s investment in Holister had risen from $85,700 to $93,300.

a. Assuming Alison uses the equity method, what balance should appear in the Investment in Holister account as of December 31, 2018?

b. Assuming Alison uses fair-value accounting, what income from the investment in Holister should be reported for 2018

Answer 1

a) Equity Method
Acquisition Price	$70,500
Book Value—assets minus liabilities ($224,500 - $96,500 = $128,000 x 40%)	-$51,200
Excess Payment	$19,300
Value of patent in excess of book value ($41,800 -$13,300 x 40%)	-$11,400
Goodwill	$7,900
Amortization:
Patent ($41800 -$13300) x 40% = 11400/6	$1,900
Goodwill	$0
Annual Amortisation	$1,900
Acquisition price	$70,500
Equity income 2017 ($51,500 x 40%)	$20,600
Dividends—2017 ($17,000 x 40%)	-$6,800
Amortization—2017 (above)	-$1,900
Investment in Holister, 12/31/07	$82,400
Equity income—2018 ($70,500 x 40%)	$28,200
Dividends—2018 ($22,000 x 40%)	-$8,800
Amortization—20018 (above)	-$1,900
Investment in Holister, 12/31/18	$99,900
b)Fair value Accounting
Income from investment
Dividends—2018 ($22,000 x 40%)	$8,800
Increase in Fair Value ($93,300 - $85,700)	$7,600
Investment income under fair value	$16,400