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During January 2019, Mindy, Inc. acquired 30% of the outstanding common stock of Milton Co. for...

During January 2019, Mindy, Inc. acquired 30% of the outstanding common stock of Milton Co. for $1,500,000. This investment gave Mindy the ability to exercise significant influence over Milton. Milton’s assets on that date were recorded at $6,400,000 with liabilities of $3,000,000. Any excess of cost over book value of Mindy’ investment was attributed to unrecorded patents having a remaining useful life of ten years.

In 2019, Milton reported net income of $600,000. For 2020, Milton reported net income of $750,000. Dividends of $200,000 were paid in each of these two years. What was the reported balance of Mindy’ Investment in Wilson Co. at December 31, 2020 and how much was the reported investment income in Wilson for 2020?

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Expert Solution

Patent to be recognised on Date of acquisition=Fair value of net identifiable assets- Book value of net assets of Milton co.(30%)

Book value of net assets=$6,400,000-$3,000,000=$3,400,000

Fair value of net identifiable assets=$1,500,000/.30=$5,000,000

Patent recognised=$5,000,000-$3,400,000=$1,600,000

Now, each year adjustment is to be made in net income for amortiastion of patent,Adjusted net income is calculated as below

2019 2020
Net income before adjustment $600,000 $750,000
Adjustment for patent (Amortisation) ($160,000) (160,000)
Net income after adjustment $440,000 $590,000

Amortisation on patent=$1,600,000/10=$160,000

Now If a significant influence is gained investment is recorded as per equity method and share of net income and dividend increases and reduces investment respectively.

INvestment value as on December 2019=Initial investment recorded at amount paid-Share of dividend received+Share of net income received (2019)

Amount paid for Investement =$1,500,000

Share of dividend=$200,000*30%=$60,000

Share of net income=$440,000*30%=$132,000

Investment value as on December 2019=$1,500,000-$60,000+$132,000

=$1,572,000

Investment value as on December 2020=Investment value as on December 2019-Share of dividend received-Share of net income received (2020)

Share of dividend=$200,000*30%=$60,000

Share of net income=$590,000*30%=$177,000

=$1,572,000-60,000+177,000

Investment value as on December 31 2020=$,1689,000

Investment revenue in 2020 (Sshare of net income of Milton)= $177,000

ekkarill92 answered 1 year ago
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