Question

On January 1, 2017, Alison, Inc., paid $85,700 for a 40 percent interest in Holister Corporation’s common stock. This investee had assets with a book value of $256,000 and liabilities of $83,500. A patent held by Holister having a $9,800 book value was actually worth $20,300. 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 $48,000 and declared and paid dividends of $16,000. In 2018, it had income of $52,000 and dividends of $21,000. During 2018, the fair value of Allison’s investment in Holister had risen from $99,100 to $105,100.

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	Assumung Alison uses the equity method, balance that should appear in the
	investment in Holister account as of December 31, 2018
	Consideration paid for 40% share	$85,700
	Less: Book value of 40% net asset value ($256000-$83500)	$69,000
	Excess of fair value over book value	$16,700
	Excess allocated to
	Patent- 40% (20300-9800)	$4,200
	Goodwill	$12,500
	Investment in Holister account on Jan 1, 2017	$85,700
	Add: Net income of Holister for 2017-40%	$19,200
	Less: Dividend received-40%	$6,400
	Less: Patent amortization	$700
	Investment in Holister account on Dec 31, 2017	$97,800
	Add: Net income of Holister for 2018-40%	$20,800
	Less: Dividend received-40%	$8,400
	Less: Patent amortization	$700
	Investment in Holister account on Dec 31, 2018	$109,500
b	Assuming Alison uses fair value accounting, Income from the investment in Holister
	that should be reported for 2018
	Dividend paid by Holister	$21,000
	40% share of Alison	$8,400
	Changes in Fair value (105100-99100)	$6,000
	Income from Investment in Holister	$14,400