Question

In: Accounting

On January 1, 2020, Mehan, Incorporated purchased 15,000 shares of Cook Company for $150,000 giving Mehan...

On January 1, 2020, Mehan, Incorporated purchased 15,000 shares of Cook Company for $150,000 giving Mehan a 15% ownership of Cook. The fair value of the 15% investment was the same as the carrying value of the investment when, on January 1, 2021, Mehan purchased an additional 25,000 shares (25%) of Cook for $300,000. This last purchase gave Mehan the ability to apply significant influence over Cook. The book value of Cook on January 1, 2020 was $1,000,000. The book value of Cook on January 1, 2021, was $1,100,000. Any excess of cost over book value for this second transaction is assigned to a database and amortized over four years.

Cook reports net income and dividends as follows. These amounts are assumed to have occurred evenly throughout the years:

Net Income Dividends
2020 $ 200,000 $ 50,000
2021 225,000 50,000
2022 250,000 60,000

On April 1, 2022, just after its first dividend receipt, Mehan sells 10,000 shares of its investment.

What was the balance in the investment account at April 1, 2022 just before the sale of shares?

The answer is $535,875.

$517,500 + ($25,000 − $625) − $6,000 = $535,875

2022 Beginning Investment Account Balance + (40% of 1st Quarter Income – 1st Quarter Amortization) – 1st Quarter Dividend

My question is how do you get 2022 Beginning Investment Account Balance?

Solutions

Expert Solution

Amount $
Cost of Investment of January 1,2020        150,000
Cost of Investment of January 1,2021        300,000
Add: Investment revenue of 2021            90,000 =225000*0.4
Less: Dividend received of 2021            20,000 =50000*0.4
Less: Amrotization of database for 2021              2,500 (25,000/4 ) x 40%
2022 Beginning Investment Account Balance        517,500
Calculation of Database amount Amount $
Purchase Consideration for 25%        300,000
Less: Net assets acquired ( 1,100,000 x 25% )        275,000
Amount attributable to Database           25,000

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