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In: Accounting

On January 1, 2017, Alison, Inc., paid $90,400 for a 40 percent interest in Holister Corporation’s...

On January 1, 2017, Alison, Inc., paid $90,400 for a 40 percent interest in Holister Corporation’s common stock. This investee had assets with a book value of $248,500 and liabilities of $93,500. A patent held by Holister having a $12,300 book value was actually worth $55,800. 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 $52,500 and declared and paid dividends of $18,000. In 2018, it had income of $56,000 and dividends of $23,000. During 2018, the fair value of Allison’s investment in Holister had risen from $102,300 to $107,100.

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?

Solutions

Expert Solution

A)

Acquisition price (1) $90400
Book value ( asset - liability) (2) $62000
[(248500-93500) × 40%]
Excess payment (3 = 1-2) $28400
Value of patent in excess of book value (4) $17400
[(55800-12300) × 40%]
Goodwill (3 - 4) $11000
Amortization:
Patent ($17400/6) $2900
Goodwill -
Annual amortization $2900
Acquisition price $90400
Basic equity accrual ($52500 × 40%) $21000
Dividend ( $18000 × 40%) ($7200)
Amortization (2017) ($2900)
Investment in holister 12/31/2017 $101300
Basic equity accrual ($56000 × 40%) $22400
Dividend ($23000 × 40%) ($9200)
Amortization (2018) ($2900)
Investment in holister , 21/31/2018 $111600

Therefore, the company should report the investment at $111600

B)

Dividend income $9200
Increase in fair value ($107100-$102300) $4800
Income $14000

Therefore, the income from investment = $14000

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