Question
In: Accounting
On January 1, 2018, Deuce Inc. acquired 15% of Wiz Co.’s outstanding common stock for $62,400...
On January 1, 2018, Deuce Inc. acquired 15% of Wiz Co.’s outstanding common stock for $62,400 and did not exercise significant influence. Wiz earned net income of $96,000 in 2018 and paid dividends of $36,000. The fair value of Deuce’s investment was $80,000 at December 31, 2018. On January 3, 2019, Deuce bought an additional 10% of Wiz for $54,000. This second purchase gave Deuce the ability to significantly influence the decision making of Wiz. During 2019, Wiz earned $120,000 and paid $48,000 in dividends. As of December 31, 2019, Wiz reported a net book value of $468,000. At the date of the second purchase, Deuce concluded that Wiz Co.’s book values approximated fair values and attributed any excess cost to goodwill. 17. On Deuce’s December 31, 2019 balance sheet, what balance was reported for the Investment in Wiz Co. account? A) $117,000. B) $143,400. C) $152,000. D) $134,400. E) $141,200. Answer: C Explanation: 2018 Purchase = $62,400. The investment was increased to fair value of $80,000 at 12/31/18. 2019 Income = ($120,000 × 25%) = $30,000 2019 Dividend = ($48,000 × 25%) = $12,000 Ending 2019 Balance = ($80,000 + $54,000 + $30,000 - $12,000) = $152,000
Question: why the $80,000 are not multiplied by the .15?
Solutions
Expert Solution
| Amount in $ | |||
| Investment at cost on 01-1-2018 | 62,400 | ||
| Add: fair value adjustment | 17,600 | ( 80,000 - 62,400 ) | |
| Investment on 31-12-2018 | 80,000 | ||
| Add: Additional purchase in 2019 | 54,000 | ||
| Add: Investment revenue | 30,000 | (120,000*25% ) | |
| Less: Dividend | 12,000 | (48,000*25%) | |
| Investment on 31-12-2019 | 152,000 | ||
| Correct answer is option c (i.e. $ 152,000 ). | |||
| On 31-12-2018, the investment was stock investment that's why they were adjusted for the fair value to arrive at $ 80,000. After additional purchase, investment changes to Investment in associates & the same was dealt as per Equity method . | |||
| ** 80,000 has not multiplied by 15% because 80,000 was fair value of investment of our cost of 62,400 . We have to bring our investment at fair value of $ 80,000 for that we have done fair value adjustment of $17,600 ( 80,000 - 62,400 ). | |||
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