In: Accounting
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?
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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