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

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

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

Therefore, the income from investment = $14000

I have given complete and detailed solution of your problem, in case of any query you can comment and

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ekkarill92 answered 1 year ago

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