Question

HI There, there is no solution for a problem that I am looking for. Advanced Accouting - Chapter 4, problem 30. Can you please assist? Thanks.

Posada Company acquired 7,000 of the 10,000 outstanding shares of Sabathia Company on January 1, 2013, for $840,000. The subsidiary’s total fair value was assessed at $1,200,000 although its book value on that date was $1,130,000. The $70,000 fair value in excess of Sabathia’s book value was assigned to a patent with a 5-year remaining life.

On January 1, 2015, Posada reported a $1,085,000 equity method balance in the Investment in Sabathia Company account. On October 1, 2015, Posada sells 1,000 shares of the investment for $191,000. During 2015, Sabathia reported net income of $120,000 and declared dividends of $40,000. These amounts are assumed to have occurred evenly throughout the year.

a.	How should Posada report the 2015 income that accrued to the 1,000 shares prior to their sale? (Do not round your intermediate calculations.) b. What is the effect on Posada’s financial statements from this sale of 1,000 shares? (Do not round your intermediate calculations.)

Answer 1

1) How should Posada report the 2015 income that accrued to the 1,000 shares prior to their sale?

Solution: $7,950

Working:

Sabathia FV on 01/01	1,200,000
Sabathia BV	-1,130,000
Patent	70,000
Life of patent	5 years
Annual amortization	14,000
Sabathia's net income	120,000
Excess patent fair value amortization	-14,000
Sabathia's adjusted net income	106,000
Fraction of year held	9/12
Sabathia’s adjusted net income for 9 months	79,500
Percentage owned by Posada	1
Posada’s share of Sabathia’s 9 month net income	55,650
Shares sold: 1,000 out of 7,000	1/7th
Posada’s income for shares sold	7950

　

2) What is the effect on Posada’s financial statements from this sale of 1,000 shares?

Solution: $31,050

Working:

Balance (Provided-equity method)	1,085,000
Recognition of 1/1 to –10/1 period:
Income accrual ($120,000 * 70% * 3/4)	63,000
Dividends ($40,000 * 70% * 3/4)	-21,000
Amortization ($14,000 * 70% * 3/4)	-7,350
Presale investment BV	1,119,650
Presale investment BV	1,119,650
Portion of investment sold (1,000/7,000 shares)	1/7th
Book value of investment sold	159,950
Proceeds	191,000
Credit to Posada’s additional paid-in-capital	31,050